Working Paper: CEPR ID: DP3332
Authors: Giuseppe Bertola; Luigi Guiso; Luigi Pistaferri
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; Heckman; Exclusion Restriction; Optimal Inaction
JEL Codes: D11; D12; D91
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher uncertainty regarding future income (D89) | Lower probability of adjustment in durables consumption (D12) |
| Higher uncertainty regarding future income (D89) | Size of adjustment in durables consumption (D12) |
| Expected earnings (D33) | Size of adjustment in durables consumption (D12) |