A Model of Housing in the Presence of Adjustment Costs: A Structural Interpretation of Habit Persistence

The paper provides a model of household consumption and portfolio allocation which incorporates housing as both a consumption good and a component of wealth. Household utility depends, possibly nonseparably, on two goods: nondurable consumption, which is costlessly adjustable, and housing, which is...

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Bibliographic Details
Published inThe American economic review Vol. 98; no. 1; pp. 474 - 495
Main Authors Flavin, Marjorie, Nakagawa, Shinobu
Format Journal Article
LanguageEnglish
Published American Economic Association 01.03.2008
Subjects
Asset pricing
Consumer behavior
Consumption
Costs
Curvature
Durable goods
Financial portfolios
Household consumption
Households
Housing
Marginal utility
Risk aversion
Shorter Papers
Utilities costs
Utility functions
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ISSN0002-8282
DOI10.1257/aer.98.1.474

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Summary:The paper provides a model of household consumption and portfolio allocation which incorporates housing as both a consumption good and a component of wealth. Household utility depends, possibly nonseparably, on two goods: nondurable consumption, which is costlessly adjustable, and housing, which is subject to a nonconvex adjustment cost. Households face housing price risk in the sense that the relative price of housing varies over time, and can invest in a wide variety of financial assets in addition to housing. This single, reasonably tractable, model generates testable implications for portfolio allocation, risk aversion, asset pricing, and the dynamics of nondurable consumption. (JEL D14, G11, R21)
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
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ISSN:0002-8282
DOI:10.1257/aer.98.1.474