Title A panel data model for subjective information on household income growth
Authors Das, J.W.M. (659940) (137115008); Soest, A.H.O. van (732966) (074814095)
Year 1996
Journal Journal of Economic Behavior & Organization
ISSN 0167-2681
Number of pages 35
Abstract Subjective expectations about future income changes are analyzed, using household
panel data. The models used are extensions of existing binary choice panel
data models to the case of ordered response. We consider static models with random
and fixed individual effects. We also look at a dynamic random effects model
which includes a measure for permanent and transitory income. We find that income
change expectations strongly depend on realized income changes in the past:
those whose income fell, are more pessimistic than others, while those whose income
rose are more optimistic. Expected income changes are also significantly affected by
employment status, family composition, permanent income, and past expectations.
Expectations are then compared to the head of households ex post perception of
the realized income change for the same period. The main finding is that rational
expectations are rejected, and that in particular, households whose income has
decreased in the past underestimate their future income growth.
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