Econometrica: Apr, 1980, Volume 48, Issue 3

Imperfect Capital Markets, Demand for Durables, and the Consumer Lifetime Allocation Process

https://doi.org/0012-9682(198004)48:3<577:ICMDFD>2.0.CO;2-N
p. 577-594

Sheng Cheng Hu

This paper constructs a life-cycle model of the consumer's allocation process in which the capital market is imperfect and the consumption bundle at each instant includes both durable and nondurable goods. The nondurables are instantaneously consumed at the moment of purchase, while the durable good is accumulated and yields a flow of services over its lifetime. The durable investment is assumed to be irreversible. The consumer's optimal allocation program is shown to vary between the periods of borrowing and lending with each phase defining a different relationship between consumption and the "truncated" permanent income.