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Don’t Expect Too Much – High Income Expectations and Over-Indebtedness

Author

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  • Klühs, Theres

    (Leibniz University of Hannover)

  • Koch, Melanie

    (DIW Berlin)

  • Stein, Wiebke

    (Leibniz University of Hannover)

Abstract

Household indebtedness is rising worldwide. This study investigates one possible driver of this increase that is rooted in the theory of permanent income: high income expectations. We collect data from an emerging country, Thailand, as (over-) indebtedness in markets with incomplete financial infrastructure and social security can be devastating. Furthermore, our sample of rural households is exposed to a high degree of uncertainty, which makes expectation formation prone to behavioral biases. We implement a new measure for high income expectations and show that it is strongly and robustly related to both objective and subjectively felt over-indebtedness. Controlling for various household characteristics, unexpected shocks, and other possible confounding factors reduces the concern about reverse causality. In an additional lab-in-the-field experiment, we explicitly find that overconfidence, a specific form of biased expectation, is related to overborrowing.

Suggested Citation

  • Klühs, Theres & Koch, Melanie & Stein, Wiebke, 2019. "Don’t Expect Too Much – High Income Expectations and Over-Indebtedness," Rationality and Competition Discussion Paper Series 200, CRC TRR 190 Rationality and Competition.
    • Handle: RePEc:rco:dpaper:200
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    More about this item

    Keywords

    household debt; lab-in-the-field experiment; emerging markets;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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