Expectations, Learning, and Household Choices
Saturday, Jan. 6, 2018 2:30 PM - 4:30 PM
- Chair: Camelia M. Kuhnen, University of North Carolina-Chapel Hill
Labor Market Search Without Rational Expectations
AbstractThis paper uses new and rich panel data on individuals' labor market expectations and realizations. We study the correlates of labor market expectations (labor market status; earnings; offers; reservation wages), and investigate whether expectations are predictive of actual outcomes. The panel aspect of the data -- combined with data on expectations and future outcomes -- allows us to study how individuals update their labor market beliefs in response to unanticipated shocks. We find that: (1) expectations vary in meaningful ways, and tend to be predictive of actual outcomes, and (2) individuals update their beliefs about future labor market offers and reservation wages in a way inconsistent with Bayesian updating. The updating of beliefs is found to be asymmetric, with individuals' responsiveness to positive unanticipated shocks being much larger than that to negative ones. We embed the empirical evidence that we document on expectations and learning into a model of search on and off the job with learning. Because individuals are too optimistic, reservation wages are too high and individuals are in lower wage jobs than if learning were rational, resulting in significant welfare losses.
House Price Expectations and Leverage Choice: Empirical Evidence
AbstractTo what extend do friendship links affect the adoption of new products? We first combine social network data with individual choices on the adoption of the newly introduced Google Pixel phone to estimate the effects of friends’ adoption of a new product on individual purchasing decisions. We use the exclusive introduction of the Pixel by Verizon combined with differences in Verizon market share across the US to instrument for friends’ initial adoption of the phone. Next, we analyze the role of county level connections on the adoption of a wide variety of products in stores across US counties. Counties that are more connected socially adopt new products at similar times. We explore whether consumers in more socially connected counties have access to a more new products and a wider variety of products and the implications of such consumption externalities on consumer welfare.
Inflation Experiences and Contract Choice – Evidence From Residential Mortgages
AbstractWe show that personal lifetime experiences of inflation significantly affect the valuation of fixed- versus variable-rate financial instruments. The experience-effect hypothesis predicts that individuals who have experienced higher inflation expect nominal interest rates to increase more. Hence, if borrowing, they demand greater protection against increases in nominal interest rates. In the context of mortgage financing, we analyze how borrowers choose between fixed-rate and adjustable-rate options. We estimate that every additional percentage point of experienced inflation increases a borrower’s willingness to pay for a fixed-rate mortgage by 6 to 21 basis points of the FRM contract rate, as compared to an adjustable rate mortgage. This experience effect has a major impact on the product mix of FRMs versus ARMs: nearly one in six households would switch to an ARM if not for the impact of inflation experiences. Simulations of counterfactual mortgage payments suggest that households who would otherwise have switched pay approximately $8,000 in year-2000, after-tax dollars for the embedded inflation protection of the FRM over their expected tenure in the house, implying significant welfare consequences.
- D1 - Household Behavior and Family Economics
- D8 - Information, Knowledge, and Uncertainty