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| Abstract: We study the role an illiquid durable consumption
good plays in determining the level of precautionary savings and the distribution
of wealth in a standard Aiyagari model (i.e. a model with heterogeneous
agents, idiosyncratic uncertainty, and borrowing constraints). Transactions
costs induce an inaction region over which the durable stock and the associated
user cost are not adjusted in response to changes in income, increasing,
on average, the volatility of non-durable consumption. The volatility of
total consumption is then a function of the share of the durable good in
the utility function and the width of the inaction region. We are particularly
interested in parameterizations which increase the precautionary motive
for saving through an increase in "committed expenditure risk." We
find, for an empirically relevant share of durable consumption and for all
transaction costs below an upper threshold, that the level of precautionary
savings is increasing in the transaction costs. Transaction costs have only
a modest impact on the degree of wealth dispersion, as measured by the Gini
index, as the associated increase in savings is close to linear in wealth.
While we are unable to match the dispersion of wealth in the data, we increase
the dispersion over a single asset model (Gini index of .71 for financial
assets and .37 for total wealth) and we are able to match the relative dispersion
of financial to durable assets, i.e. we find financial assets much more
unequal than durable assets. We also match the ratio of housing wealth to
total wealth for the median agent. We calibrate the model to data from the
PSID, the CES, and the SCF.
Full paper (793 KB PDF)
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