This paper tests an optimal (S, s) rule in household durable purchases and examines directly the resulting aggregate expenditure dynamics. The observed decision rule responds to income uncertainty and growth as predicted by an (S, s) model resulting from transactions costs. Tests against liquidity constraints find that about half the households purchase according to an optimal (S, s) rule. Aggregating the (S, s) rule over households produces a cross-section distribution of durables holdings. The empirical distribution is similar to that predicted theoretically, as is its response to aggregate shocks. Furthermore, simulations of aggregate expenditure based on the household distribution exhibit dynamics consistent with those observed in the 1980s.

This paper tests an optimal (S, s) rule in household durable purchases and examines directly the resulting aggregate expenditure dynamics. The observed decision rule responds to income uncertainty and growth as predicted by an (S, s) model resulting from transactions costs. Tests against liquidity constraints find that about half the households purchase according to an optimal (S, s) rule. Aggregating the (S, s) rule over households produces a cross-section distribution of durables holdings. The empirical distribution is similar to that predicted theoretically, as is its response to aggregate shocks. Furthermore, simulations of aggregate expenditure based on the household distribution exhibit dynamics consistent with those observed in the 1980s.

This paper extends the theory of investment under uncertainty to incorporate fixed costs of investment, a wedge between the purchase price and sale price of capital, and potential irreversibility of investment. In this extended framework, investment is a nondecreasing function of q, the shadow price of installed capital. The optimal rate of investment is in one of three regimes (positive, zero, or negative gross investment), depending on the value of q relative to two critical values. In general however, the shadow price q is not directly observable, so we present two examples relating q to observable variables.

Recurrent intervals of inattention to the stock market are optimal if consumers incur a utility cost to observe asset values.When consumers observe the value of their wealth, they decide whether to transfer funds between a transactions account from which consumption must be financed and an investment portfolio of equity and riskless bonds.Transfers of funds are subject to a transactions cost that reduces wealth and consists of two components: one is proportional to the amount of assets transferred, and the other is a fixed resource cost.Because it is costly to transfer funds, the consumer may choose not to transfer any funds on a particular observation date.In general, the optimal adjustment rule---including the size and direction of transfers, and the time of the next observation---is state-dependent.Surprisingly, unless the fixed resource cost of transferring funds is large, the consumer's optimal behavior eventually evolves to a situation with a purely time-dependent rule with a constant interval of time between observations.This interval of time can be substantial even for tiny observation costs.When this situation is attained, the standard consumption Euler equation holds between observation dates if the consumer is sufficiently risk averse.

Heterogeneity is ubiquitous in firm-level and sectoral data. Equilibrium models, how-ever, typically assume a representative firm, as in Andrew B. Abel and Olivier J. Blanchard (1983). The representative firm paradigm leaves no role for the distribution of capital. We model capital reallocation in a general equilibrium model with two sectors. Capital adjustment costs capture illiquidity in our model, similar to Hirofumi Uzawa’s (1969) capital installation technology. We follow Fumio Hayashi (1982) in assuming that the production technology is linearly homogeneous, which allows us to focus on the sectoral distribution of capital, separately from the level of total capital. The two sectors may have different levels of productivity, and we show that the distribution of capital between the two sectors is the single state variable gov-erning investment, growth, and valuation in the economy.We analytically characterize prices and quan-tities, including investment, growth, the interest rate, and the price of capital (Tobin’s

�Inattentive agents update their information sporadically, and thus respond belatedly to news. We generate optimally inattentive behavior by assuming that to observe the value of his investment portfolio the consumer must pay a cost that is proportional to the portfolio’s contempo raneous value. It is optimal for the consumer to check his investment portfolio at equally spaced points in time, consuming from a riskless trans actions account in the interim. The riskless transactions account that finances consump tion guarantees that funds are never unwittingly exhausted. � We show that the optimal interval of time between consecutive observations of the value of the portfolio is the unique positive solution to a nonlinear equation. Quantitatively, even a small observation cost (one basis point of wealth) implies a substantial (eight-month) decision interval under conventional parameter values.

In recent years, U.S. investment has been lackluster, despite rising valuations. Key explanations include growing rents and growing intangibles. We propose and estimate a framework to quantify their roles. The gap between valuations—reflected in average Q —and investment—reflected in marginal q —can be decomposed into three terms: the value of installed intangibles; rents generated by physical capital; and an interaction term, measuring rents generated by intangibles. The intangible related terms contribute significantly to the gap, particularly in fast‐growing sectors. Our findings suggest care in a pure‐rents interpretation, given the rising role of intangibles.