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The valuation of household production: divorce, wrongful injury and death litigation

American Journal of Economics and Sociology, The, April, 1994 by Charles C. Fischer

Introduction

"BABY, YOU'VE COME A LONG WAY!" This catchy one-liner, devised by Madison Avenue for a leading cigarette manufacturer, was aimed at the modern women of the late 1970s. Today, most women would strongly resent being called "baby" and would seriously question just how far they have come. There is good cause for skepticism on a number of economic fronts: occupational access, vertical career mobility, male-female pay equality, access to education and on-the-job training, and, not least, the valuation of household production, the focus of this article.

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Attempts to measure household production are routinely undertaken by forensic economists for assessment of damages in divorce, and wrongful injury and death litigation. In such cases, household production is often the single or principal source of economic value to the plaintiff or the estate. The accurate measurement of household production may be of substantial pecuniary significance to affected parties, but, unfortunately, is highly problematic.

The purpose of this article is to examine the valuation of household production by forensic economists. Both research and practice are explored. Survey data obtained by the author provide important insights into current practice. The data suggest a lower-bound, conservative approach as being accepted practice by forensic economists.

The remainder of the article is organized as follows. In Part II, a brief review of the main methodological approaches for valuing household production advanced in the literature is presented. This literature is contrasted with questionnaire data on current practices by forensic economists in Part III. In Part IV the implications of these findings are examined. Finally, in Part V, a summary and conclusions are set forth.

Methodology

DIFFERENT METHODOLOGICAL APPROACHES have been advanced in the literature for measuring household production. Those that have received the most attention by researchers (see Fischer, 1993) are reviewed below.

Opportunity Cost. A strategic concept in economic decision making is opportunity (or sacrifice) cost. Opportunity cost valuation approaches assume that individuals act rationally (act upon benefit-cost considerations), and that the highest paying alternative use of one's time, skills and efforts is a reasonable basis for determining their value in the use at hand (Larimore, 1991). The application of opportunity cost to the measurement of household production is straightforward: (1) homemakers are assumed to be rational (maximizers), (2) thus, if one chooses to be a homemaker it must be her/his best alternative, and (3) therefore, the value of home production must at least equal the value of the next-best alternative in the market (Leonesio, 1988).

In the orthodox approach, the next-best alternative is defined as that labor market employment which offers the best fit with current household producer's productivity-related characteristics--job experience, training/education, aptitude, etc. The driving element behind value in this approach is the current productivity profile of the homemaker. However, as some have argued (Becker, 1981; Becker and Tolmes, 1986; Ireland, 1991), this may result in an undervaluation of home production since homemaker skills often do not have direct relevance to labor markets. That is, if a homemaker had invested in developing labor market skills to the extent she/he did in acquiring home production skills, the next-best alternative in the market would probably be greater in value than the current alternative, given current human capital. Interestingly, the converse is ruled out by opportunity cost theory--that is, an individual possessing high job market skills, but few homemaking skills, being overvalued as a poor or incompetent homemaker. This would violate the assumption of maximizing behavior whereby an individual always chooses his/her first-best option. As such, opportunity cost is a lower bound valuation. The value of one's first-best option is at least as great as, but may be greater than, the value of the next-best.

In an attempt to overcome this limitation of orthodox opportunity cost, Ireland (1991) has proposed using long-term opportunity cost. In his Implied Family Human Capital methodology, the value of household production is approximated by simulating plausible future job opportunities that would likely be available had the homemaker specialized in labor market production, instead of home production. The baseline for these simulations is the point at which the homemaker pursues the acquisition of household, rather than labor marks, capital. One example provided by Ireland is that of a housewife who was planning to earn a master's degree in psychology, but instead emphasized her husband's career and child rearing (1991: 298). Ireland identifies plausible alternative careers available to individuals possessing a masters in psychology. The gross lifetime earnings associated with these careers establish the range of values for approximating lost household production in this case. (After gross income is derived forensic economists subtract personal consumption expenditures to arrive at net damages; normally, future income taxes are not factored in because of their speculative nature.)

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The valuation of household production: divorce, wrongful injury and death litigation

American Journal of Economics and Sociology, The, April, 1994 by Charles C. Fischer

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