Household production and development

The authors introduce home production into the neoclassical growth model and examine its consequences for development economics. They focus on how well differences in policies that distort capital accumulation explain international income differences. In models with home production, such policies not only reduce capital accumulation, they also change the mix of market and nonmarket activity; therefore, for a given policy differential, these models generate larger differences in output than standard models. The authors show that policy differences’ welfare implications (hence the welfare implications of differences in market income) change when home production is explicitly incorporated into the model.