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Expectations in micro data: rationality revisited

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  • Hugo Benítez-Silva
  • Debra Dwyer
  • Wayne-Roy Gayle
  • Thomas Muench

Abstract

An increasing number of longitudinal data sets collect expectations information regarding a variety of future individual level events and decisions, providing researchers with the opportunity to explore expectations over micro variables in detail. We present a theoretical framework and an econometric methodology to use that type of information to test the Rational Expectations (RE) hypothesis in models of individual behavior. This RE assumption at the micro level underlies a majority of the research in applied fields in economics, and it is the common foundation of most work in dynamic models of individual behavior. We present tests of three different types of expectations using two different panel data sets that represent two very different populations. In all three cases we cannot reject the RE hypothesis. Our results support a wide variety of models in economics, and other disciplines, that assume rational behavior.
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Suggested Citation

  • Hugo Benítez-Silva & Debra Dwyer & Wayne-Roy Gayle & Thomas Muench, 2008. "Expectations in micro data: rationality revisited," Empirical Economics, Springer, vol. 34(2), pages 381-416, March.
  • Handle: RePEc:spr:empeco:v:34:y:2008:i:2:p:381-416
    DOI: 10.1007/s00181-007-0127-4
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    Cited by:

    1. Benítez-Silva, Hugo & Eren, Selçuk & Heiland, Frank & Jiménez-Martín, Sergi, 2015. "How well do individuals predict the selling prices of their homes?," Journal of Housing Economics, Elsevier, vol. 29(C), pages 12-25.
    2. Helen Levy & Kristin Seefeldt, 2008. "How Do Lower-Income Families Think about Retirement?," Working Papers wp195, University of Michigan, Michigan Retirement Research Center.
    3. Huynh, Kim P. & Jung, Juergen, 2015. "Subjective health expectations," Journal of Policy Modeling, Elsevier, vol. 37(4), pages 693-711.
    4. Benitez-Silva, Hugo & Dwyer, Debra S., 2006. "Expectation formation of older married couples and the rational expectations hypothesis," Labour Economics, Elsevier, vol. 13(2), pages 191-218, April.
    5. Beni­tez-Silva, Hugo & Ni, Huan, 2008. "Health status and health dynamics in an empirical model of expected longevity," Journal of Health Economics, Elsevier, vol. 27(3), pages 564-584, May.
    6. Huynh, Kim P. & Jung, Juergen, 2015. "Subjective health expectations," Journal of Policy Modeling, Elsevier, vol. 37(4), pages 693-711.
    7. Frank N. Caliendo & Maria Casanova & Aspen Gorry & Sita Slavov, 2016. "The Welfare Cost of Retirement Uncertainty," NBER Working Papers 22609, National Bureau of Economic Research, Inc.
    8. Olympia Bover, 2015. "Measuring expectations from household surveys: new results on subjective probabilities of future house prices," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 6(4), pages 361-405, November.
    9. Beatrice Scheubel & Daniel Schunk & Joachim Winter, 2009. "Don't Raise the Retirement Age! An Experiment on Opposition to Pension Reforms and East-West Differences in Germany," CESifo Working Paper Series 2752, CESifo.

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    More about this item

    Keywords

    Rational expectations; Retirement; Longevity; Education expectations; Instrumental variables; Sample selection; D84; J26;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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