DP13229 Credit Shocks and Equilibrium Dynamics in Consumer Durable Goods Markets

Author(s): Alessandro Gavazza, Andrea Lanteri
Publication Date: October 2018
Date Revised: December 2018
Keyword(s): credit constraints, Durable goods
JEL(s): E21, E32, L62
Programme Areas: Industrial Organization, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13229

This paper studies the equilibrium dynamics in consumer durable goods markets after aggregate credit shocks. We introduce two novel features into a general-equilibrium model of durable consumption with heterogeneous households facing idiosyncratic income risk and borrowing constraints: (1) different qualities of durable goods trade on secondary markets at market-clearing prices; and (2) households endogenously choose when to trade them or scrap them. The model successfully matches several empirical patterns that we document using data on U.S. car markets around the Great Recession. After a tightening of the borrowing limit, debt-constrained households postpone the decision to scrap and upgrade their low-quality cars, depressing mid-quality car prices. In turn, this effect reduces wealthy households' incentives to replace their mid-quality cars with high-quality ones, thereby decreasing new-car sales. We further use our framework to study the effects of collateral constraints and aggregate income shocks, and to evaluate targeted fiscal stimulus policies such as the Car Allowance Rebate System in 2009 ("Cash for Clunkers").