February 10, 2010

Introducing home production in a life-cycle model

In this paper we will analyze the effects of the introduction of home production in the life-cycle model as developed by Van Erp en De Hek (2009). To introduce home-production we have added an extra nest in the utility function.

The consumption good in the model of Van Erp and De Hek is substituted with a composite consumption good that consists of goods directly purchased at the market and goods that are produced at home. For the latter goods we also assume that inputs have to be bought in the market.

With this adjusted model, we analyze what the effects on labour supply, wealth and consumption patterns are. Surprisingly, the introduction of home production results in more accumulation of wealth.

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