Title: Essays on consumption and financial decisions of Households
Abstract: My dissertation contains three essays in which I examine the consumption and financial
decisions of households. These essays are based on the econometric analysis of the dataset
DHS which contains a wide quantity of information on Dutch families, including subjective expectations about future income. The first two works concentrate on household consumption decisions. The third work gives an empirical contribution in the debate on the shape of the subjective discount function and, therefore, on the problem of the dynamic inconsistency.
Chapter 1 studies whether anomalies in consumption can be explained by a behavioral
model in which agents make predictable errors in forecasting income. I show that the null hypothesis of rational expectations is rejected in favor of the behavioral model, since consumption responds to predictable forecast errors. On average agents who we are predictably excessively pessimistic increase consumption after the predictable positive income shock. On average agents who are too optimistic reduce consumption.
Chapter 2 tests the excess sensitivity of consumption to predicted income growth using
a modified version of the Euler equation which allows for myopia and/or irrationality.
Using a number of self-reported financial indicators I select different subsets of the sample
in order to distinguish the response to income changes of agents with and without possible liquidity constraints. Results suggest that the observed excess sensitivity to income becomes statistically insignificant when systematic errors in income forecasts are taken into account.
Chapter 3 focuses on two main issues. First, I find that, on average, households' discount
rates decline. This implies dynamically inconsistent preferences. Second, I calculate an indicator of the degree of dynamic inconsistency which may help one to understand how households overcome their self-control problems. I use the DHS households' reports on the compensation for receiving hypothetical rewards with delays. I find that individuals with more severely dynamicly inconsistent preferences on average hold a statistically significantly lower share of their total wealth in checking accounts. A possible interpretation is that subjects use precommitment strategies to limit their temptation to consume immediately.
Publication Year: 2009
Publication Date: 2009-01-13
Language: en
Type: article
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