INCOME UNCERTAINTY, CONSUMER DURABLES INVESTMENTS, AND HOME PRODUCTION: EVIDENCE FROM CHINA

We investigate the effect of uncertainty on home durable purchase decisions, and empirically evaluate the efficacy of consumer durable policies under uncertainty. A model of lumpy home capital adjustment shows that elevated uncertainty leads households to adopt a cautionary perspective and postpone their capital adjustment. We test this prediction using microevidence from China where both uncertainty and home production are substantial. We exploit a wide‐scale rebate program funded by the Chinese government as a natural experiment, and examine the impact on household investment. We find strong, significant, and robust evidence that greater income uncertainty inhibits durable adjustment. Our findings highlight the impediment that income uncertainty poses to investment in home durables, which are often considered as “engines of liberation” in emerging economies. (JEL E21, E64, J22, O16, O23, D91)