Downward rigidity, precautionary delay, and portfolio choice

We study how downward rigidity in durable goods shapes household portfolio choice. When reducing living standards is psychologically costly, as with housing or major durable goods, households face an asymmetric adjustment problem: upgrading is frictionless, whereas downsizing is costly. This asymmetry produces three results. First, durable consumption exhibits ratchet-like dynamics: households maintain service levels within an inaction region and adjust only at extreme wealth levels. Second, the fear of future downsizing creates a precautionary delay: households require a larger financial buffer before upgrading, even when upgrades are costless. Third, portfolio choice becomes state-dependent: the optimal risky share is U-shaped within the inaction region and converges to the frictionless Merton benchmark only near adjustment boundaries. These results link nonpecuniary durable-market frictions to time-varying risk premia and consumption inertia observed in household data, providing tractable implications for portfolio policy and welfare analysis.