Consumption vs. Expenditure

68 Pages Posted: 27 Feb 2004 Last revised: 15 Aug 2014

See all articles by Mark Aguiar

Mark Aguiar

Princeton University

Erik Hurst

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

Date Written: February 2004

Abstract

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.

Suggested Citation

Aguiar, Mark and Hurst, Erik, Consumption vs. Expenditure (February 2004). NBER Working Paper No. w10307, Available at SSRN: https://ssrn.com/abstract=510005

Mark Aguiar

Princeton University ( email )

Princeton, NJ 08544-1021
United States

Erik Hurst (Contact Author)

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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