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

Theres Klühs, Melanie Koch and Wiebke Stein
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Theres Klühs: Leibniz University of Hannover
Melanie Koch: DIW Berlin
Wiebke Stein: Leibniz University of Hannover

No 200, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

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.

Keywords: household debt; lab-in-the-field experiment; emerging markets (search for similar items in EconPapers)
JEL-codes: D14 D84 D91 (search for similar items in EconPapers)
Date: 2019-11-20
New Economics Papers: this item is included in nep-exp and nep-sea
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Persistent link: https://EconPapers.repec.org/RePEc:rco:dpaper:200

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