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Consider the following quote from the book, $\textit{Men at Arms}$ by Terry Pratchett.

“The reason that the rich were so rich, Vimes reasoned, was because they managed to spend less money.

Take boots, for example. He earned thirty-eight dollars a month plus allowances. A really good pair of leather boots cost fifty dollars. But an affordable pair of boots, which were sort of OK for a season or two and then leaked like hell when the cardboard gave out, cost about ten dollars. Those were the kind of boots Vimes always bought, and wore until the soles were so thin that he could tell where he was in Ankh-Morpork on a foggy night by the feel of the cobbles.

But the thing was that good boots lasted for years and years. A man who could afford fifty dollars had a pair of boots that'd still be keeping his feet dry in ten years' time, while the poor man who could only afford cheap boots would have spent a hundred dollars on boots in the same time and would still have wet feet.

This was the Captain Samuel Vimes 'Boots' theory of socioeconomic unfairness.”

With what Pratchett wrote, I was thinking about a car-buying decision by a newly wed couple.

Consider two cars:
1. Durable Car: sturdy, long-lasting, and safe for even kids when they are born. Looking ahead for about 10-15 years usage wihtout too much maintain break downs.
2. Cheap Car: inexpensive, easy for commute, but expect maintenance cost to be high and possibly totaled withint 6-9 years.

Their financing needs are:
1. Durable Car down payment: USD 10,000
2. Cheap Car down payment: USD 2,000

Their monthly leasing fees are:
1. Durable car monthly leasing fee: USD 200
2. Cheap car monthly leasing fee: USD 300

There are two newly wed couples: a financially affluent one, and a poverty stricken one.

Control all other factors such as credit score of both couples, financing terms and horizon, etc.

According to Pratchett, the poor couple would always resort to the cheap car option while the rich couple always resorts to the durable car option. Do you agree? What are your thoughts?

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  • $\begingroup$ I'm voting to close this question as off-topic because it does not seem to be a good fit for the SE format. You can see this yourself as you struggle in the end to ask an actual question. $\endgroup$ – Giskard Jun 27 at 5:00
  • $\begingroup$ @Giskard This is not off topic. It is related to durable capital and financing. There is a question being asked at the end. Are you blind? $\endgroup$ – Frank Swanton Jun 27 at 5:20
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    $\begingroup$ 3. I am not sure you see the issue here. The question is open ended. It does not really have a definitive answer. It goes: [story] "Do you agree? What are your thoughts?" Most questions like this cannot be answered in a definitive way. They may be fine questions, but not for the SE format. $\endgroup$ – Giskard Jun 27 at 6:49
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    $\begingroup$ A general (1.) and a specific (2.) comment: 1. SE follows a strict format and open discussions a la "what do you think?" are generally seen as a bad fit. This does not mean that it is an uninteresting topic. The community is asked to follow the protocol so that Giskard is right to raise this point and the community can vote on it. Please don't read it as a personal attack or hostility. I certainly didn't read it that way. 2. What kind of answer are you looking for? There is a literature on "planned obsolescence", is this what you search? $\endgroup$ – Bayesian Jun 27 at 20:05
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    $\begingroup$ What @Bayesian said, plus: there’s also a literature on the high cost of being poor, which is how I’ve always read that Pratchett quote— it’s not that poor people make an unconstrained choice to use goods and services that are more expensive over their lifetime, it’s that they face budget or other constraints that rule out other possibilities. $\endgroup$ – dismalscience Jun 27 at 21:09
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Rampini elaborates on your idea (and also the Pratchett quote) in his AER article "Financing Durable Assets". See the abstract:

This paper studies how the durability of assets affects financing. We show that more durable assets require larger down payments making them harder to finance, because durability affects the price of assets and hence the overall financing need more than their collateral value. Durability affects technology adoption, the choice between new and used capital, and the rent versus buy decision. Constrained firms invest in less durable assets and buy used assets. More durable assets are more likely to be rented. Economies with weak legal enforcement invest more in less durable, otherwise dominated assets and are net importers of used assets.

Similarly, Orhun and Palazzolo study this argument in "Frugality Is Hard to Afford" in the context of bulk buying large packets at low prices vs. only being able to buy small packets.

Intertemporal savings strategies, such as bulk buying or accelerating purchase timing to take advantage of a good deal, provide long-term savings in exchange for an increase in immediate spending. Although households with limited financial resources stand to benefit the most from these strategies, they are less likely to make use of them. The authors provide causal evidence that liquidity constraints impede low-income households’ ability to use these strategies, above and beyond the impact of other constraints. Exploiting recurring variation in household liquidity, this study shows that when low-income households have more liquidity, they partially catch up to higher-income households’ ability to use intertemporal savings strategies. The findings provide guidance to marketing managers and researchers regarding targeted promotional design and measurement of deal-proneness. For policy makers, they suggest a new path for decreasing the higher prices low-income households have been documented to pay for everyday goods. Policies have traditionally focused on increasing financial literacy or access to supermarkets. Our work suggests that providing greater liquidity can help low-income households make better use of savings opportunities already available to them.

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  • $\begingroup$ Thank you for the response!! $\endgroup$ – Frank Swanton Jun 27 at 23:02
  • $\begingroup$ The references are excellent as well. Thanks! $\endgroup$ – Frank Swanton Jun 27 at 23:07

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