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Can households see into the future? Survey evidence from the Netherlands

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  • Massenot, Baptiste
  • Pettinicchi, Yuri

Abstract

This paper presents new evidence on the expectation formation process from a Dutch household survey. Households become too optimistic about their future income after their income has improved, consistent with the overextrapolation of their experience. We show that this effect of experience is persistent and that households overextrapolate income losses more than income gains. Furthermore, older households overextrapolate more, suggesting that they did not learn over time to form more accurate expectations. Finally, we study the relationship between expectation errors and consumption. We find that more overoptimistic households intend to consume more and subsequently report higher consumption, even though they do not consume as much as they intended to. These results suggest that overextrapolation hurts consumers and amplifies business cycles.

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  • Massenot, Baptiste & Pettinicchi, Yuri, 2019. "Can households see into the future? Survey evidence from the Netherlands," Journal of Economic Behavior & Organization, Elsevier, vol. 164(C), pages 77-90.
    • Handle: RePEc:eee:jeborg:v:164:y:2019:i:c:p:77-90
    DOI: 10.1016/j.jebo.2019.05.021
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    2. Altig, David & Barrero, Jose Maria & Bloom, Nicholas & Davis, Steven J. & Meyer, Brent & Parker, Nicholas, 2022. "Surveying business uncertainty," Journal of Econometrics, Elsevier, vol. 231(1), pages 282-303.
    3. Marta Cota, 2023. "Extrapolative Income Expectations and Retirement Savings," CERGE-EI Working Papers wp751, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    4. Nakazono, Yoshiyuki & Koga, Maiko & Sugo, Tomohiro, 2020. "Private information and analyst coverage: Evidence from firm survey data," Journal of Economic Behavior & Organization, Elsevier, vol. 174(C), pages 284-298.
    5. Massenot, Baptiste & Pettinicchi, Yuri, 2019. "Can households see into the future? Survey evidence from the Netherlands," Journal of Economic Behavior & Organization, Elsevier, vol. 164(C), pages 77-90.
    6. Leth-Petersen, Søren & Lee, Minjoon & Caplin, Andrew & Shapiro, Matthew D. & Sæverud, Johan, 2022. "How Worker Productivity and Wages Grow with Tenure and Experience: The Firm Perspective," CEPR Discussion Papers 17545, C.E.P.R. Discussion Papers.
    7. Jose Maria Barrero & Nicholas Bloom & Steven J. Davis, 2020. "COVID-19 Is Also a Reallocation Shock," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 51(2 (Summer), pages 329-383.
    8. Cristiano Antonelli & Christophe Feder, 2022. "Knowledge properties and the creative response in the global economy: European evidence for the years 1990–2016," The Journal of Technology Transfer, Springer, vol. 47(2), pages 459-475, April.
    9. Massenot, Baptiste & Pettinicchi, Yuri, 2018. "Can firms see into the future? Survey evidence from Germany," Journal of Economic Behavior & Organization, Elsevier, vol. 145(C), pages 66-79.
    10. Zeno Enders & Franziska Hünnekes & Gernot Müller, 2022. "Firm Expectations and Economic Activity," Journal of the European Economic Association, European Economic Association, vol. 20(6), pages 2396-2439.
    11. Bachmann, Rüdiger, 2019. "Comments on “Monetary policy announcements and expectations: Evidence from German firms”," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 64-68.
    12. Alexandros Botsis & Christoph Görtz & Plutarchos Sakellaris, 2020. "Quantifying Qualitative Survey Data: New Insights on the (Ir)Rationality of Firms' Forecasts," CESifo Working Paper Series 8148, CESifo.
    13. Ruediger Bachmann & Kai Carstensen & Stefan Lautenbacher & Martin Schneider, 2021. "Uncertainty and Change: Survey Evidence of Firms's Subjective Beliefs," CESifo Working Paper Series 9394, CESifo.
    14. Giuseppe Fiori & Filippo Scoccianti, 2021. "The Economic Effects of Firm-Level Uncertainty: Evidence Using Subjective Expectations," Questioni di Economia e Finanza (Occasional Papers) 630, Bank of Italy, Economic Research and International Relations Area.
    15. Cristiano Antonelli & Christophe Feder, 2023. "The foundations of Schumpeterian dynamics: The European evidence," Journal of Evolutionary Economics, Springer, vol. 33(1), pages 65-96, January.

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