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Expected and realized income changes: Evidence from the Dutch socio-economic panel

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  • Das, Marcel
  • van Soest, Arthur

Abstract

Income expectations play a central role in household decision making. In the life cycle model for example, consumption and savings decisions reflect expectations of future income. In empirical applications where direct information on expectations is not available, it is usually assumed that expectations are rational, and reflected by observed future realizations. In this paper, we analyze direct subjective information on expected changes of household income in one panel wave of Dutch families. First, we describe these data and investigate how the expectations can be explained by, among other variables, income changes in the past. Second, we combine these data with information on realized income changes in the next panel wave, and analyze the dierences between expected and realized changes. We find that, on average, households underestimate their future incomes signiantly. In particular, this holds for those families whose income has fallen in the past.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 32 (1997)
Issue (Month): 1 (January)
Pages: 137-154

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Handle: RePEc:eee:jeborg:v:32:y:1997:i:1:p:137-154

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  1. Jeff Dominitz & Charles F. Manski, 1994. "Using Expectations Data to Study Subjective Income Expectations," Econometrics 9411003, EconWPA.
  2. Hall, Robert E & Mishkin, Frederic S, 1982. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," Econometrica, Econometric Society, vol. 50(2), pages 461-81, March.
  3. Hardle, W., 1992. "Applied Nonparametric Methods," Discussion Paper 1992-6, Tilburg University, Center for Economic Research.
  4. Christopher D. Carroll, 1992. "How does future income affect current consumption?," Working Paper Series / Economic Activity Section 126, Board of Governors of the Federal Reserve System (U.S.).
  5. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1994. "Income Risk, Borrowing Constraints and Portfolio Choice," CEPR Discussion Papers 888, C.E.P.R. Discussion Papers.
  6. Deaton, Angus, 1992. "Understanding Consumption," OUP Catalogue, Oxford University Press, number 9780198288244, October.
  7. Giucca, P. & Jappelli, T. & Terlizzese, D., 1992. "Earning Uncertainty and Precautionary Saving," Papers 161, Banca Italia - Servizio di Studi.
  8. Kapteyn, A.J. & Kooreman, P. & Willemse, R., 1987. "Some methodological issues in the implementation of subjective poverty definitions," Research Memorandum 245, Tilburg University, Faculty of Economics and Business Administration.
  9. Hey, John D., 1994. "Expectations formation: Rational or adaptive or ...?," Journal of Economic Behavior & Organization, Elsevier, vol. 25(3), pages 329-349, December.
  10. Carroll, Christopher D & Fuhrer, Jeffrey C & Wilcox, David W, 1994. "Does Consumer Sentiment Forecast Household Spending? If So, Why?," American Economic Review, American Economic Association, vol. 84(5), pages 1397-1408, December.
  11. Miles S. Kimball, 1989. "Precautionary Saving in the Small and in the Large," NBER Working Papers 2848, National Bureau of Economic Research, Inc.
  12. Oliver LINTON, . "Applied nonparametric methods," Statistic und Oekonometrie 9312, Humboldt Universitaet Berlin.
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