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

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  • Das, J.W.M.
  • Soest, A.H.O. van

    (Tilburg University, Center for Economic Research)

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

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1995-52.

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Date of creation: 1995
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Handle: RePEc:dgr:kubcen:199552

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Web page: http://center.uvt.nl

Related research

Keywords: Household Economics; Decision Making; Household Income; microeconomics;

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  1. Hardle, Wolfgang & Linton, Oliver, 1986. "Applied nonparametric methods," Handbook of Econometrics, in: R. F. Engle & D. McFadden (ed.), Handbook of Econometrics, edition 1, volume 4, chapter 38, pages 2295-2339 Elsevier.
  2. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1996. "Income Risk, Borrowing Constraints, and Portfolio Choice," American Economic Review, American Economic Association, vol. 86(1), pages 158-72, March.
  3. Robert E. Hall & Frederic S. Mishkin, 1980. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," NBER Working Papers 0505, National Bureau of Economic Research, Inc.
  4. Kapteyn, A.J. & Kooreman, P. & Willemse, R.J., 1988. "Some methodological issues in the implementation of subjective poverty definitions," Open Access publications from Tilburg University urn:nbn:nl:ui:12-364358, Tilburg University.
  5. Jeff Dominitz & Charles F. Manski, 1994. "Using Expectations Data to Study Subjective Income Expectations," Econometrics 9411003, EconWPA.
  6. Carroll, Christopher D, 1994. "How Does Future Income Affect Current Consumption?," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 111-47, February.
  7. Hey, John D., 1994. "Expectations formation: Rational or adaptive or ...?," Journal of Economic Behavior & Organization, Elsevier, vol. 25(3), pages 329-349, December.
  8. Giucca, P. & Jappelli, T. & Terlizzese, D., 1992. "Earning Uncertainty and Precautionary Saving," Papers 161, Banca Italia - Servizio di Studi.
  9. Deaton, Angus, 1992. "Understanding Consumption," OUP Catalogue, Oxford University Press, number 9780198288244, October.
  10. Miles S. Kimball, 1989. "Precautionary Saving in the Small and in the Large," NBER Working Papers 2848, National Bureau of Economic Research, Inc.
  11. 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.
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