I am working on my paper on household production over the business cycle (although seems weird to call this one a "cycle" since we're just kind of puttering along in the trough), reading Greenwood and Hercowitz's 1991 JPE paper "The Allocation of Capital and Time Over the Business Cycle", and I came across this interesting point (when they mention "household capital" they're refering to both residential investment and also consumer durables which are inputs to household production):
"Another problem with the perfect substitution assumption arises
when taxation of market activity is considered. Although both capital
stocks are subject to property taxes, only business capital is subject to
income taxation, which is far from being trivial (see Jorgenson and
Yun 1986). This creates a significant distortion favoring the accumulation
of household capital at the expense of business capital. This
feature of the tax system, which is incorporated in the current analysis,
is likely to be important for modeling the behavior of business
and household investment. In a model with perfect substitution between
the two capital stocks, business capital would be driven to zero."
This is paper - which talks a lot about household capital - is less important for me than another in the same issue by Benhabib, Rogerson, and Wright, which focuses more on home production and labor supply. But it was an interesting point.
All of these are RBC models. The RBC guys have definitely done the most work incorporating household production into macro.
Think About This For a Second
2 hours ago