Earn More Tomorrow: Overconfident Income Expectations and Consumer Indebtedness

SFB Rationality & Competition, Discussion Paper No. 152

89 Pages Posted: 24 Apr 2019

See all articles by Antonia Grohmann

Antonia Grohmann

German Institute for Economic Research (DIW Berlin); Aarhus University

Lukas Menkhoff

German Institute for Economic Research (DIW Berlin); Humboldt University of Berlin - Faculty of Economics

Christoph Merkle

Aarhus University

Renke Schmacker

German Institute for Economic Research (DIW Berlin)

Date Written: April 15, 2019

Abstract

This paper examines whether biased income expectations due to overconfidence lead to higher levels of debt-taking. In a lab experiment, participants can purchase goods by borrowing against their future income. We exogenously manipulate income expectations by letting income depend on relative performance in hard and easy quiz tasks. We successfully generate biased income expectations and show that participants with higher income expectations initially borrow more. Overconfident participants scale back their consumption after feedback. However, at the end of the experiment they remain with higher debt levels, which represent real financial losses. To assess the external validity, we find further evidence for the link between overconfidence and borrowing behavior in a representative survey (GSOEP-IS).

Keywords: Debt, Consumption, Borrowing, Overconfidence, Income Expectations

JEL Classification: D14, D84, G40

Suggested Citation

Grohmann, Antonia and Menkhoff, Lukas and Merkle, Christoph and Schmacker, Renke, Earn More Tomorrow: Overconfident Income Expectations and Consumer Indebtedness (April 15, 2019). SFB Rationality & Competition, Discussion Paper No. 152, Available at SSRN: https://ssrn.com/abstract=3372805 or http://dx.doi.org/10.2139/ssrn.3372805

Antonia Grohmann

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Aarhus University ( email )

Nordre Ringgade 1
DK-8000 Aarhus C, 8000
Denmark

Lukas Menkhoff

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Humboldt University of Berlin - Faculty of Economics ( email )

Spandauer Strasse 1
Berlin
Germany

Christoph Merkle (Contact Author)

Aarhus University ( email )

Nordre Ringgade 1
DK-8000 Aarhus C, 8000
Denmark

HOME PAGE: http://christophmerkle.github.io/

Renke Schmacker

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

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