Unobserved Inputs in Household Production

Most household production studies ignore unobserved inputs. Without additional assumptions, however, estimated impacts of the observed inputs cannot provide informative estimates of marginal products because of contaminating variations in unobserved inputs. Not even the signs of marginal impacts can be ascertained. One can establish the direction of these biases and significantly reduce them by including detailed information about nonproductive (pure consumption) goods in the analysis. Estimates from prior demand studies can also help determine the direction of the bias. We describe the stringent assumptions one must invoke in the absence of such additional information to be able to relate estimated effects to the true marginal products.