Micro and Macro Implications of Household Finance Seminar - Orazio Attanasio (UCL)

Expectations of future variables often play an important role in economic models of individual behaviour. In many contexts, it is not only the expected value of a random variable that plays an important role in shaping individual behaviour but several features of the variables’ (perceived) probability distribution. In this paper, we develop a methodology to use efficiently data on the subjective distribution function of certain variables elicited from respondents, in conjunction with information about current realised variables. We use these data to estimate the parameters of a model of the variable of interest, starting with a simple model that imposes a number of restrictions, such as (log)linearity, and then move to more flexible specifications. We apply the approach to information on household income, collected over two waves from panel samples in Colombia and India. Our approach allows us to estimate subjective measures of risk and persistence that we show to be heterogeneous in the samples we study, both across current income levels and individuals. We present evidence from both data sets that strongly reject simple versions of the model in favour of more flexible version that allow for a considerable amount of asymmetry and non-linearity.

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