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Complementarity and Substitutability in the Consumption-Leisure Choice Under Equilibrium Price Dispersion: from the “Theorem of Lemons” to the Coase Theorem

Complementarity and Substitutability in the Consumption-Leisure Choice Under Equilibrium Price Dispersion: from the “Theorem of Lemons” to the Coase Theorem

Journal of Institutional Studies, , Vol. 11 (no. 1),

The rigidity of the classical ‘labor-leisure’ choice results in opposing views on the counterweight for the distorting effect of taxation on labor supply. The analysis of the consumption-leisure trade-off under the equilibrium price dispersion discovers the role of search as the vehicle for the consumption-leisure complementarity and substitutability. The consumption-leisure relationship emerges indirectly with the help of the search that decreases in the “common model” behavior, described by the Cobb-Douglas utility function, either ex ante, or ex post with regard to the purchase, both labor and leisure time. The trade-off between labor costs of purchase and search&care transaction costs appears in the form of the propensity to search. The model of the optimal consumer choice examines the consumption-leisure relationship and its elasticity with the help of the “theorem of lemons”. The self-deactivation of the market of used cars does not take place because the market is regulated by the equilibrium price per mile in the taxi, which is equal to the willingness to pay of consumers with zero transaction costs. Driving becomes a specific form of home production. Pleasant driving reduces the purchase price of a mile, substitutes leisure, and increases the elasticity of demand for the mileage. The demand for the mileage becomes elastic when consumers are willing to take care of their cars and to bear ex post search transaction costs. The willingness to take care supports the demand for good cars and the market does not fail. The idea of the willingness to take care of purchase challenges the concept of the endowment effect. When pre-purchase ex ante costs are equal to zero, the ‘willingness to pay – willingness to accept’ disparity takes place because the transfer of property rights redistributes the ex post costs of care between sellers and buyers in favor for the more efficient use of an asset. The costs of care like the costs of pre-purchase search can take either the monetary form of expenses or the physical form of efforts and time. When markets propose to customers search&care services for big-ticket items, consumers face the traditional “to produce or to buy” dilemma, now with regard to search-leisure substitutability. They reduce unpleasant search of necessities in malls in favor of leisure time and reduce leisure time by the pleasant search of luxuries in boutiques. Consumers can also purchase unpleasant maintenance costs and increase their leisure time but they are ready to spend money, efforts, and time on pleasant care that substitutes leisure. The propensity to search and the willingness to take care internalize negative externalities and the Coase theorem holds for the positive transaction costs.

Keywords: willingness to take care of purchase; price dispersion; consumption; leisure; search; complementarity; substitutability; theorem of lemons; Coase theorem

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