Don’t Expect Too Much – High Income Expectations and Over-Indebtedness. No. 200

Diskussionspapiere extern

Theres Klühs, Melanie Koch, Wiebke Stein

Munich: Collaborative Research Center Transregio 190, 2019, 55 S. : Anh.
(Discussion paper / Rationality & Competition, CRC TRR 190 ; 200)


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.

Melanie Koch

Research Associate in the International Economics Department

JEL-Classification: D14;D84;D91
Keywords: household debt; lab-in-the-field experiment; emerging markets
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