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Lifecycle Prices and Production

Mark Aguiar

University of Rochester - Department of Economics

Erik Hurst

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

July 2005

FRB of Boston Public Policy Discussion Paper No. 05-3

Using scanner data and time diaries, we document how households substitute time for money through shopping and home production. We find evidence that there is substantial heterogeneity in prices paid across households for identical consumption goods in the same metro area at any given point in time. For identical goods, prices paid are highest for middleaged, rich, and large households, consistent with the hypothesis that shopping intensity is low when the cost of time is high. The data suggest that a doubling of shopping frequency lowers the price paid for a given good by approximately 10 percent. From this elasticity and observed shopping intensity, we impute the shopper's opportunity cost of time, which peaks in middle age at a level roughly 40 percent higher than that of retirees. Using this measure of the price of time and observed time spent in home production, we estimate the parameters of a home production function. We find an elasticity of substitution between time and market goods in home production of close to 2. Finally, we use the estimated elasticities for shopping and home production to calibrate an augmented lifecycle consumption model. The augmented model predicts the observed empirical patterns quite well. Taken together, our results highlight the danger of interpreting lifecycle expenditure without acknowledging the changing demands on time and the available margins of substituting time for money.

Number of Pages in PDF File: 58

Keywords: lifecycle consumption, permanent income hypothesis, home production, time use

JEL Classification: E2, D1, D4

working papers series

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Date posted: March 4, 2006  

Suggested Citation

Aguiar, Mark and Hurst, Erik, Lifecycle Prices and Production (July 2005). FRB of Boston Public Policy Discussion Paper No. 05-3. Available at SSRN: http://ssrn.com/abstract=887948 or http://dx.doi.org/10.2139/ssrn.887948

Contact Information

Mark Aguiar (Contact Author)
University of Rochester - Department of Economics ( email )
Harkness Hall
Rochester, NY 14627
United States
Erik Hurst
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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