Time: 12:15 pm – 1:30 pm
Date: February 12 , 2019
Place: Room 3001
Alan OLIVI (MIT) – “Revealed Preferences and Beliefs from Consumption-Savings Decision” Polytechnique Recruitment
Abstract:
What can we robustly infer about preferences and beliefs from the observation of consumption-saving choices? To answer this question, we study the canonical consumption-savings income fluctuations problem with incomplete markets in the standard Subjective Expected Utility framework. We cast the model in continuous time, allowing general processes for income and utility. Crucially, we also allow for general beliefs. Agents can learn over time, change their beliefs with macroeconomic conditions and, more importantly, be systematically biased in an almost unrestricted way. Our main theoretical results provide a novel set of non-parametric identification conditions showing moments of the data that directly reveal preferences and beliefs. Implementing this strategy using data from the PSID and the SIPP, we find that households are overconfident and overoptimistic. Households underestimate the frequency of shocks, which constitutes the main source of overconfidence. Their optimism is driven by an underappreciation of negative shocks. These biases are however not homogeneous in the population: they are amplified for lower income households, while at higher income levels, perceptions are closer to rational expectations. Quantitatively, our results explain why the typical household undersaves and overreacts to income shocks but also why higher income households accumulate disproportionately more wealth. We then explore how these beliefs affect the design of unemployment insurance and the transmission of countercyclical income risk to aggregate demand.