TY  - JOUR
AU  - Aguiar,Mark
AU  - Hurst,Erik
TI  - Consumption vs. Expenditure
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10307
PY  - 2004
Y2  - February 2004
UR  - http://www.nber.org/papers/w10307
L1  - http://www.nber.org/papers/w10307.pdf
N1  - Author contact info:
Mark A. Aguiar
Department of Economics
Princeton University
Fisher Hall
Princeton, NJ 08544-1021
E-Mail: mark@markaguiar.com

Erik Hurst
Booth School of Business
University of Chicago
Harper Center
Chicago, IL  60637
Tel: 773/834-4073
Fax: 773/702-0458
E-Mail: erik.hurst@chicagobooth.edu
AB  - Standard tests of the permanent income hypothesis (PIH) using data on nondurables typically equate expenditures with consumption. However, as noted by Becker (1965), consumption is the output of a  home production' function that uses both expenditure and time as inputs. With this in mind, we revisit the retirement consumption puzzle by documenting that the dramatic decline in expenditures at the time of retirement is matched by an equally dramatic rise in time spent on home production. The innovation of our paper is that we empirically disentangle changes in actual consumption from changes in expenditures. To do so, we use a novel data set which collects detailed food diaries for a large cross-section of U.S. households. We show that despite the decline in food expenditures, neither the quantity nor the quality of food intake deteriorates with retirement status. However, unemployed households experience a decline in consumption commensurate to the impact of job displacement on permanent income. Taken together, the results on retirement and unemployment highlight how direct measures of consumption distinguish between anticipated and unanticipated shocks to income, while using expenditure alone obscures this difference and leads to false rejections of the PIH.
ER  -