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How Much Do Households Really Know About Their Future Income?

Swapnil Singh and Christian A. Stoltenbergz ()
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Christian A. Stoltenbergz: University of Amsterdam and Tinbergen Institute

No 55, Bank of Lithuania Working Paper Series from Bank of Lithuania

Abstract: We develop a consumption-savings model that distinguishes households’ perceived income uncertainty from income uncertainty as measured by an econometrician. Households receive signals on their future disposable income that can drive a gap between the two uncertainties. With an uncertainty gap that is consistent with direct estimates stemming from subjective income expectations, the model jointly explains three consumption inequality and insurance measures in US micro data that are not captured without the difference: (i) the cross-sectional variance of households’ consumption, (ii) the covariance of current consumption and income growth and (iii) the income-conditional mean of household consumption.

Keywords: Risk sharing; Advance information; Consumption insurance; Endogenous borrowing constraints; Limited commitment (search for similar items in EconPapers)
JEL-codes: E21 D31 D52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-ias and nep-mac
Date: 2018-12-21
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Persistent link: https://EconPapers.repec.org/RePEc:lie:wpaper:55

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