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Consumption Choices and Earnings Expectations: Empirical Evidence and Structural Estimation

Author

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  • Christian Stoltenberg

    (MInt, Department of Economics, University of Amsterdam and Tinbergen Institutem, The Netherlands)

  • Arne Uhlendorf

    (CREST, CNRS, Palaiseau, France)

Abstract

In this paper, we document that households’ consumption expenditures depend on their expected earnings – even after controlling for realized earnings and wealth. To explain this evidence, we develop and structurally estimate a standard-incomplete markets model in which rational households possess private advance information on their future earnings. We find that households are better informed about their future earnings than an econometrician and that individual expectations are more relevant for the consumption choices of households in the left tail of the wealth distribution. Furthermore, households with advance information prefer less progressive earnings taxes.

Suggested Citation

  • Christian Stoltenberg & Arne Uhlendorf, 2022. "Consumption Choices and Earnings Expectations: Empirical Evidence and Structural Estimation," Working Papers 2022-15, Center for Research in Economics and Statistics.
    • Handle: RePEc:crs:wpaper:2022-15
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    References listed on IDEAS

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    Cited by:

    1. 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).
    2. Stephane Bonhomme & Angela Denis, 2023. "Estimating Individual Responses when Tomorrow Matters," Papers 2310.09105, arXiv.org, revised May 2024.
    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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