What Drives Replacement of Durable Goods at the Micro Level?

Technological innovations have contributed over the years to an increasing stock of durable goods - those products that are not immediately consumed but provide a stream of services over a long period of time. Indeed, virtually every household in a modern economy owns a refrigerator, a personal computer and an automobile. Given the inter-temporal nature of replacement decisions, the existing literature has resorted to the technique of dynamic programming, and most recently to the theory of stochastic processes. This article focuses on micro replacement decisions. We survey some representative models of the recent literature, and discuss their empirical testability. In addition, we study replacement of home appliances in the United States, and construct a test statistic that leads to conclude that replacement decisions might be correlated across appliances. Finally, we enrich our analysis by developing a theoretical model in which replacement decisions are interdependent.