Consumption Of Real Assets And The Clientele Effect

This paper develops a theoretical model that explains how long-term consumption goals influence households' choice of real assets in situations when these assets have no investment value. Using a suburban residential housing market that exemplifies such a market, we develop a general equilibrium model for the valuation of illiquid assets. We show that, in equilibrium, clientele effect persists, with long-tenure agents overwhelmingly choosing higher quality properties and short-tenure agents settling for lower quality properties. Equilibrium values of our model variables related to buyers and sellers are simultaneously determined in a competitive Nash equilibrium. We also show that price-based liquidity and time-based liquidity measures may behave in a conflicting manner in equilibrium, which is a novel result in itself. This paper contributes to the understanding of a consumption-based clientele effect as well as different measures of liquidity.