DP3332 Uncertainty and Consumer Durables Adjustment

Author(s): Giuseppe Bertola , Luigi Guiso , Luigi Pistaferri

Publication Date: April 2002

Keyword(s): adjustment costs , optimal inaction , Heckman exclusion restriction

JEL(s): D11 , D12 , D91

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP3332.asp

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.