Earn More Tomorrow: Overconfident Income Expectations and Consumer Indebtedness. No. 152

Diskussionspapiere extern

Antonia Grohmann, Lukas Menkhoff, Christoph Merkle, Renke Schmacker

Munich: Collaborative Research Center Transregio 190, 2019, 94 S.
(Discussion paper / Rationality & Competition, CRC TRR 190 ; 152)

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).

Antonia Grohmann

Research Associate in the International Economics Department

Lukas Menkhoff

Head of Department in the International Economics Department

Topics: Education



JEL-Classification: D84;D14
Keywords: consumption; borrowing; overcondence; income expectations
Externer Link:
https://rationality-and-competition.de/wp-content/uploads/discussion_paper/95.pdf