Earn More Tomorrow: Overconfident Income Expectations and Consumer Indebtedness

Antonia Grohmann, Lukas Menkhoff, Christoph Merkle and Renke Schmacker

No 152, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

Abstract: This paper examines whether biased income expectations due to overconfidence lead to higher levels of debt-taking. In a lab experiment, participants can purchase goods by borrowing against their future income. We exogenously manipulate income expectations by letting income depend on relative performance in hard and easy quiz tasks. We successfully generate biased income expectations and show that participants with higher income expectations initially borrow more. Overconfident participants scale back their consumption after feedback. However, at the end of the experiment they remain with higher debt levels, which represent real financial losses. To assess the external validity, we nd further evidence for the link between overcondence and borrowing behavior in a representative survey (GSOEP-IS).

Keywords: consumption; borrowing; overcondence; income expectations (search for similar items in EconPapers)
JEL-codes: D14 D84 G40 (search for similar items in EconPapers)
Date: 2019-04-15
New Economics Papers: this item is included in nep-exp
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Earn More Tomorrow: Overconfidence, Income Expectations and Consumer Indebtedness (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:rco:dpaper:152

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