Consumption and Home Production over the Life Cycle

Wenli Li, Fang Yang and Michael Dotsey
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Michael Dotsey: Federal Reserve Bank of Philadelphia

No 423, 2010 Meeting Papers from Society for Economic Dynamics

Abstract: In this paper, we document households' time use and consumption over the life cycle. Specifically, households spend a roughly constant amount of hours doing market work and home production early in the life cycle. At age 50, they begin to reduce their market hours sharply and increase home hours. Households' expenditure on goods bought from the market for consumption, goods bought for home production, and housing services all exhibit hump shapes as they age, with the market good having the most pronounced hump, followed by the home good, and then housing services. We then incorporate home production in a dynamic stochastic general equilibrium model of consumption and savings with illiquid housing and collateralized borrowing constraint. We show that a plausibly parameterized version of the model explains the observed patterns. In particular, the model predicts that the interaction of the labor efficiency profile and home production explains largely households' time use over the life cycle. The resulting income profiles as well as the endogenous borrowing constraint account for the initial humps in all three consumption goods. The consumption profiles in the second half of the life cycle are mostly driven by the complementarity of home hours, home good, and housing in home production.

Date: 2010
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