Working papers in Transport Economics,
CTS - Centre for Transport Studies Stockholm (KTH and VTI)

Abstract: Chetty (2006) developed a new method of estimating the Elasticity of Marginal Utility of Consumption (EMUC) from observed work time responses to wage changes and derived an upper bound of 2 for this parameter. Here I show that the omission of household production in Chetty’s model may lead to bias, and perform a numerical sensitivity analysis of Chetty’s results in this respect. I develop a new model that includes household production from which I derive new, unbiased EMUC formulas. I offer empirical estimates based on current evidence of the included parameters, suggesting a lower bound for EMUC of about 0.9.

Keywords: Elasticity of marginal utility of consumption; Household production; Labor supply; Coefficient of relative risk aversion; Consumer behavior

JEL-codes: D10; D60; J22

38 pages, March 29, 2016

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