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Durable Goods Markets in Heterogenous Agents Economies

Author

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  • Boris Chafwehé

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

Abstract
I provide a theoretical framework of optimal purchases of new and used consumer durables in an economy with heterogenous agents, idiosyncratic income risk and incomplete financial markets. Agents choose optimally between consuming nondurable and durable goods and accumulating a risk-free asset. The price of durable goods in the secondary market is determined endogenously, through market clearing. The model is used to study the impact of idiosyncratic unemployment risk and incomplete financial markets on market outcomes, and especially on the resale price of durables. I find that an unexpected shock to unemployment probabilities has the effect of lowering this price on impact. The mechanism behind this result is that following the increase in risk, the non-ownership option becomes more attractive to households, which rebalance their portfolio from durables towards liquid asset holdings. This decreases the demand for durable goods and exerts a downward pressure on their price.

Suggested Citation

  • Boris Chafwehé, 2017. "Durable Goods Markets in Heterogenous Agents Economies," LIDAM Discussion Papers IRES 2017021, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    • Handle: RePEc:ctl:louvir:2017021
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    File URL: https://sites.uclouvain.be/econ/DP/IRES/2017021.pdf
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    References listed on IDEAS

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