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

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  • Das, J.W.M.

    (Tilburg University)

  • Soest, A.H.O. van

    (Tilburg University)

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 differences between expected and realized changes. We find that, on average, households underestimate their future income changes significantly. 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 in its series Open Access publications from Tilburg University with number urn:nbn:nl:ui:12-121744.

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Date of creation: 1997
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Publication status: Published in Journal of Economic Behavior & Organization (1997) v., p.-
Handle: RePEc:ner:tilbur:urn:nbn:nl:ui:12-121744

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Web page: http://www.tilburguniversity.edu/

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  1. 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.
  2. Deaton, Angus, 1992. "Understanding Consumption," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198288244, October.
  3. Hey, John D., 1994. "Expectations formation: Rational or adaptive or ...?," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 25(3), pages 329-349, December.
  4. 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, American Economic Association, vol. 84(5), pages 1397-1408, December.
  5. J. Dominitz & C. F. Manski, . "Using expectations data to study subjective income expectations," Institute for Research on Poverty Discussion Papers, University of Wisconsin Institute for Research on Poverty 1050-94, University of Wisconsin Institute for Research on Poverty.
  6. Giucca, P. & Jappelli, T. & Terlizzese, D., 1992. "Earning Uncertainty and Precautionary Saving," Papers, Banca Italia - Servizio di Studi 161, Banca Italia - Servizio di Studi.
  7. HÄRDLE, Wolfgang, 1992. "Applied nonparametric methods," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 1992003, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. 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, Tilburg University urn:nbn:nl:ui:12-364358, Tilburg University.
  9. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, Econometric Society, vol. 58(1), pages 53-73, January.
  10. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1996. "Income Risk, Borrowing Constraints, and Portfolio Choice," American Economic Review, American Economic Association, American Economic Association, vol. 86(1), pages 158-72, March.
  11. Oliver LINTON, . "Applied nonparametric methods," Statistic und Oekonometrie, Humboldt Universitaet Berlin 9312, Humboldt Universitaet Berlin.
  12. Christopher D. Carroll, 1992. "How does future income affect current consumption?," Working Paper Series / Economic Activity Section, Board of Governors of the Federal Reserve System (U.S.) 126, Board of Governors of the Federal Reserve System (U.S.).
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