The User Cost of Durable Goods, Costly Reversibility Andadjustment Costs, and Demands for Durable and Nondurable Goods

We formulate and estimate a dynamic structural model of consumer behavior with the user cost of durable goods by incorporating costly reversibility and adjustment costs, and analyze the demands for durable and nondurable goods, using U.S. data. We find an important role of a secondhand market in mitigating irreversibility of durable goods with partial or 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. Our findings underscore the importance of adjustment costs often neglected in previous studies on durable goods