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Perceived versus Realized Income Dynamics: Evidence from Subjective Expectations

Author

Listed:
  • Basso, Henrique

    (Banco de España and CEMFI)

  • Bover, Olympia

    (CEMFI)

  • Galvez, Julio

    (CUNEF University)

  • Hospido, Laura

    (Banco de España, CEMFI and IZA)

Abstract

Household consumption and saving depend on perceived income risk, yet macroeconomic models typically discipline income processes using realized data. We show that these objects differ systematically. We develop a framework to recover flexible income processes from subjective expectations reported over fixed intervals, accounting for coarse elicitation and focal responses. Households perceive income as more persistent and less dispersed, with weaker state-dependent nonlinear dynamics than realized histories imply. These differences survive adjustments for reporting, measurement error, and horizon differences. In a life-cycle model, they affect precautionary saving and wealth accumulation; when households save according to perceived dynamics but face realized shocks, consumption insurance falls substantially.

Suggested Citation

  • Basso, Henrique & Bover, Olympia & Galvez, Julio & Hospido, Laura, 2026. "Perceived versus Realized Income Dynamics: Evidence from Subjective Expectations," IZA Discussion Papers 18935, IZA Network @ LISER.
    • Handle: RePEc:iza:izadps:dp18935
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    Keywords

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    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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