Uncertainty and Consumer Durables Adjustment

Giuseppe Bertola, Luigi Guiso and Luigi Pistaferri

The Review of Economic Studies, 2005, vol. 72, issue 4, 973-1007

Abstract: We characterize infrequent durables stock adjustment by consumers who also derive utility from non-durable consumption flows in the presence of idiosyncratic income uncertainty. The data we analyse include subjective future income uncertainty measures, which we use as instruments in the estimation of relevant parameters of heterogeneous consumers' dynamic adjustment problems. 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 during 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. Copyright 2005, Wiley-Blackwell.

Date: 2005
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