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Consumption Choices and Earnings Expectations: Empirical Evidence and Structural Estimation

Author

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  • Christian Stoltenberg

    (University of Amsterdam)

  • Arne Uhlendorff

    (CREST)

Abstract

In this paper, we document that households’ consumption expenditures crucially depend on their expected earnings – even after controlling for realized earnings, wealth and time-invariant unobserved characteristics such as permanent income and over-confidence. To explain this evidence, we develop and structurally estimate a standard-incomplete markets model in which rational households receive private signals on their future earnings. We find that households’ earnings uncertainty is significantly lower than what is typically assumed in incomplete markets models. Facing lower earnings uncertainty, households prefer less progressive earnings taxes.

Suggested Citation

  • Christian Stoltenberg & Arne Uhlendorff, 2023. "Consumption Choices and Earnings Expectations: Empirical Evidence and Structural Estimation," Tinbergen Institute Discussion Papers 23-022/VI, Tinbergen Institute.
  • Handle: RePEc:tin:wpaper:20230022
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    References listed on IDEAS

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    Cited by:

    1. Stephane Bonhomme & Angela Denis, 2023. "Estimating Individual Responses when Tomorrow Matters," Papers 2310.09105, arXiv.org, revised Dec 2023.
    2. van den Berg, Gerard J. & Kunaschk, Max & Lang, Julia & Stephan, Gesine & Uhlendorff, Arne, 2023. "Predicting Re-Employment: Machine Learning versus Assessments by Unemployed Workers and by Their Caseworkers," IZA Discussion Papers 16426, Institute of Labor Economics (IZA).
    3. Tao Wang, 2023. "Perceived versus Calibrated Income Risks in Heterogeneous-Agent Consumption Models," Staff Working Papers 23-59, Bank of Canada.

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    More about this item

    Keywords

    Private information; household consumption; earnings dynamics; incomplete markets; subjective expectations.;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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