Uncertainty and Consumer Durables Adjustment

46 Pages Posted: 24 May 2002

See all articles by Giuseppe Bertola

Giuseppe Bertola

University of Turin - Department of Economics

Luigi Guiso

Einaudi Institute for Economics and Finance (EIEF); Einaudi Institute for Economics and Finance

Luigi Pistaferri

Centre for Economic Policy Research (CEPR); Stanford University

Date Written: April 2002

Abstract

We study infrequent durables stock adjustment by consumers who also derive utility from non-durable consumption flows, in the presence of idiosyncratic income uncertainty. We first characterize how the extent of uncertainty bears theoretically on the cross-sectional distribution of the durable/non durable ratio, the probability of costly adjustment, and the size of adjustment. Then, we bring such predictions to bear on a data set with extensive information on disaggregated durable goods and subjective measures of future income uncertainty. The data feature two conceptually distinct sources of variation: cross-sectional heterogeneity of the sampled households' dynamic problems, and history-dependent heterogeneity in their situation at the beginning of the observation period. We note that the latter should affect the likelihood but not the size of stock adjustment decisions, and find broad support for theoretical predictions in formal selection-controlled regressions based on this insight.

Keywords: Adjustment costs, optimal inaction, Heckman exclusion restriction

JEL Classification: D11, D12, D91

Suggested Citation

Bertola, Giuseppe and Guiso, Luigi and Guiso, Luigi and Pistaferri, Luigi and Pistaferri, Luigi, Uncertainty and Consumer Durables Adjustment (April 2002). CEPR Discussion Paper No. 3332, Available at SSRN: https://ssrn.com/abstract=313648

Giuseppe Bertola (Contact Author)

University of Turin - Department of Economics ( email )

Lungo Dora Siena 100
Torino, 10153
Italy
+39 011 670 4405 (Phone)

HOME PAGE: http://https://sites.google.com/site/gipbert

Luigi Guiso

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Sallustiana 62
Rome, 00187
Italy
+39 06 4792 4858 (Phone)
+39 06 4792 4872 (Fax)

HOME PAGE: http://www.eief.it/faculty-visitors/faculty-a-z/luigi-guiso/

Einaudi Institute for Economics and Finance ( email )

Via Sallustiana 62
rome, 00187
Italy

Luigi Pistaferri

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Stanford University ( email )

Stanford, CA 94305
United States

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