Household Production, Leisure, and Living Standards
Household production is an important non-market activity and the empirical literature has developed different methods towards valuing household production without, however, providing a rigorous theoretical foundation for the various approaches. We follow the literature initiated by Becker and Lancaster and we develop a model of the household as producer and consumer that provides a theoretical justification for the two main approaches towards valuing labour in household production: the replacement cost approach and the opportunity cost approach. We provide a justification for the replacement cost approach as a way of valuing labour input into own-account production of households but show also that in general this is an incomplete measure of full consumption. We further develop a cost-of-living index for full consumption and full household income. The consequences of the theoretical model are illustrated by a cross-country comparison, using the data by Ahmad and Koh.
W. Erwin Diewert acknowledges the financial support of the Social Sciences and Humanities Research Council of Canada.
Nothing to disclose for Walter Erwin Diewert