Perceived versus Realized Income Dynamics: Evidence from Subjective Expectations

Henrique Basso, Olympia Bover, Julio Galvez and Laura Hospido ()
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Henrique Basso: Banco de España and CEMFI
Olympia Bover: CEMFI
Julio Galvez: CUNEF University
Laura Hospido: Banco de España, CEMFI and IZA

No 18935, IZA Discussion Papers from IZA Network @ LISER

Abstract: Household consumption and saving depend on perceived income risk, yet macroeconomic models typically discipline income processes using realized data. We show that these objects differ systematically. We develop a framework to recover flexible income processes from subjective expectations reported over fixed intervals, accounting for coarse elicitation and focal responses. Households perceive income as more persistent and less dispersed, with weaker state-dependent nonlinear dynamics than realized histories imply. These differences survive adjustments for reporting, measurement error, and horizon differences. In a life-cycle model, they affect precautionary saving and wealth accumulation; when households save according to perceived dynamics but face realized shocks, consumption insurance falls substantially.

Keywords: subjective expectations; income dynamics; nonlinear persistence; consumption; precautionary saving; life-cycle; panel data (search for similar items in EconPapers)
JEL-codes: C23 D15 D31 D84 E21 (search for similar items in EconPapers)
Date: 2026-09
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