A Panel Data Model for Subjective Information on Household Income Growth

Subjective expectations about future income changes are analyzed, using household panel data.The models used are extensions of existing binary choice panel data models to the case of ordered response.We consider both random and fixed individual effects.The random effects model is estimated by maximum likelihood.The fixed effects model is estimated by combining conditional fixed effects logit estimates using minimum distance.We find that income change expectations strongly depend on realized income changes in the past: those whose income fell, are more pessimistic than others, while those whose income rose are more optimistic.Expected income changes are also significantly affected by employment status and family composition.Using the same type of models, subjective expectations are then confronted with the head of household's ex post perception of the realized income change for the same period.The main finding is that households whose income has decreased in the past underestimate their future income growth.