Durable Goods, Costly Reversibility, and Adjustment Costs: A User Cost Approach with Nondurable Goods

By H. Youn KIM, K. K. Gary WONG
Published in Southern Economic Journal

Abstract:

Durable goods are typically treated as irreversible or costlessly reversible with no allowance for adjustment costs. We formulate and estimate a dynamic structural model of durable goods with the user cost that features costly reversibility and adjustment costs with nondurable goods, and analyze the demands for durable and nondurable goods using U.S. data. We find an important role of secondhand markets in mitigating the irreversibility of durable goods and smoothing consumption against income shocks, with costly reversibility. We show that the consumer’s observed behavior of durable goods, though not optimal, does not depart substantially from the time path of durables stock estimated with adjustment costs. There is a material difference in demand elasticities for nondurable and durable goods estimated with the user cost, with and without adjustment costs. While these findings are illuminating, durable goods are heterogeneous, and we find significant quantitative differences in adjustment costs among them.