In related work, Pakoˇ s (2004) considers a representative household model with nonhomothetic utility in nondurable and durable consumption. He fo- cuses on the Leontief model, in which the elasticity of substitution between the two types of goods is zero. Since the consumption of durables relative to nondurables is procyclical, a low elasticity of substitution between the goods implies procyclical marginal utility. The Leontief model therefore cannot ex- plain the value premium (since value stocks are more procyclical than growth stocks) or the countercyclical variation in the equity premium. In contrast, I estimate an elasticity of substitution between the goods that is higher than the EIS, implying countercyclical marginal.
