A Strategy for Evaluating the Opportunity Cost of Time Estimates from New Choice Margins

K.E. McConnell, Juha V. Siikamäki, V. Kerry Smith

NBER Working Paper No. 23349
Issued in April 2017
NBER Program(s):Environment and Energy Economics, Economic Fluctuations and Growth, Public Economics

Information frictions imply it is reasonable to expect the same commodity, in a given location, to sell for different prices at the same time. Aguiar and Hurst (AH) [2007] demonstrate how the search behavior implied by these price differences can be used estimate the opportunity cost of time. Their important insight allows the estimation of time prices over the lifecycle and the evaluation of the impacts of macro shocks on them. We provide the first assessment of the plausibility of this type of search behavior as a window on time prices. AH’s measures of the opportunity cost of time are shadow values that are jointly determined with individuals’ decision to search for bargains. Our analysis overcomes the challenges posed by this endogeneity by exploiting the complementarity between time and some types of market goods and services. We use changes in the expenditures for these goods in response to macro shocks as a basis for evaluating the AH choice margin. Using three different data sources we find that changes in expenditures on recreation related goods and services and time spent recreating are consistent with the AH framework’s assessment of the impact of the Great Recession for the opportunity cost of time.

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Document Object Identifier (DOI): 10.3386/w23349

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