Household Production and Consumer Demand Functions

Abstract

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.. The Econometric Society is collaborating with JSTOR to digitize, preserve and extend access to Econometrica. This paper considers the hypothesis that commodities purchased on the market by consumers are inputs into the production of goods within the household. Its implications for the family of consumer demand functions whose arguments are real income and relative prices are drawn and compared with those of the hypothesis of additive separability. The paper closes with some examples of differences in commodity demand elasticities which are qualitatively consistent with the household production hypothesis and some comments upon how the latter might be utilized in empirical work. DESPITE THE attention which economists have so lavishly given it, the theory of consumer behavior has disappointingly few implications for empirical research. For this reason, the typical demand study proceeds largely unaided by theoretical considerations, and such studies rarely include more than one or two prices of apparently related commodities in addition to income and own price in the demand func-tion to be estimated. Stimulated by the pioneering paper of Strotz [8], there has been a heartening tendency in recent years for some economists to consider restrictions in the form of various "separability" conditions on the consumer's utility function.' Separability means that marginal rates of substitution for certain pairs of commodities are functionally independent of the quantities of certain other commodities.2 Restrictions such as these reduce the number of parameters that enter into the family of demand functions of a consumer and thus make estimation of all the demand function parameters more feasible.In this paper I suggest the hypothesis that commodities purchased on the market by consumers are inputs into the production of goods within the household. Such production is characterized by conventional production functions. The goods produced, in turn, are arguments of a conventional utility function of the household. This common-sense view of the household is not particularly new, but its implications to my knowledge have never been worked out to any great extent. It was suggested to me in essentially two distinct ways. In studies of housing I have been making, it seemed both natural and convenient to view home owners as landlords who produce and sell housing services to themselves as tenants. Because of its usefulness in this particular area, I wondered whether other aspects of consumer demand might not be treated in the same way. In a totally unrelated project, I made some crude estimates of the income elasticity of expenditures for automobile operation and found values almost the same as the inc...

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