First- and second-order subjective expectations in strategic decision-making: Experimental evidence

We study first- and second-order subjective expectations (beliefs) in strategic decision-making. We elicit probabilistically both first- and second-order beliefs and apply the method to a Hide-and-Seek experiment. We study the relationship between choice and beliefs in terms of whether observed choice coincides with the optimal action given elicited beliefs. We study the relationship between first- and second-order beliefs under a coherence criterion. Weak coherence requires that if an event is assigned, according to first-order beliefs, a probability higher/lower/equal to the one assigned to another event, then the same holds according to second-order beliefs. Strong coherence requires the probability assigned according to first- and second-order beliefs to coincide. Evidence of heterogeneity across participants is reported. Verbal comments collected at the end of the experiment shed light on how subjects think and decide in a complex environment that is strategic, dynamic and populated by potentially heterogeneous individuals.     

Measuring subjective expectations in developing countries: A critical review and new evidence

The majority of economic decisions are forward-looking and thus involve expectations of future outcomes. Understanding the expectations that individuals have is thus of crucial importance to designing and evaluating policies in health, education, finance, migration, social protection, and many other areas. However, the majority of developing country surveys are static in nature and many do not elicit subjective expectations of individuals. Possible reasons given for not collecting this information include fears that poor, illiterate individuals do not understand probability concepts, that it takes far too much time to ask such questions, or that the answers add little value. This paper provides a critical review and new analysis of subjective expectations data from developing countries and refutes each of these concerns. We find that people in developing countries can generally understand and answer probabilistic questions, such questions are not prohibitive in time to ask, and the expectations are useful predictors of future behavior and economic decisions. The paper discusses the different methods used for eliciting such information, the key methodological issues involved, and the open research questions. The available evidence suggests that collecting expectations data is both feasible and valuable, suggesting that it should be incorporated into more developing country surveys.     

Inflationary expectations and monetary policy: evidence from Bangladesh

This article first estimates inflationary expectations using a Blanchard–Quah VAR model by decomposing the nominal interest rate into expected inflation and the ex ante real interest rate. Then I utilize this expected inflation along with other macroeconomic variables as inputs to the monetary policy function in a recursive VAR model to identify exogenous policy shocks. To calculate inflationary expectations, I assume that ex ante real interest rate shocks do not have a long-run effect on the nominal interest rate. This article finds that the public expects lower inflation for the future during periods of high inflation. Estimated results from the recursive VAR suggest that a contractionary policy shock increases the real interest rate, appreciates domestic currency, and lowers inflationary expectations and industrial output. However, I find a lagged policy response from Bangladesh Bank to higher inflationary expectations.     

Financial crisis and persistence: evidence from sticky expectations consumption growth model

We estimate the degree of stickiness in aggregate consumption growth for the U.S. considering the effects of the Great Recession. The behavior of stickiness estimate in the crisis is somewhat as the U-shaped pattern. Our findings imply that during the crisis consumers’ attentiveness to aggregate information has slightly increased, thereby reducing the persistence of aggregate consumption growth. However, the reduction in persistence is transitory. Since 1980, the U.S. faced five recessions and in most of them the degree of stickiness declined, albeit temporarily.     

Efficiency and formation of expectations: evidence from the European investment survey

The European Commission conducts an annual survey regarding planned and realized business fixed investment across various manufacturing sectors in Euroland. In this study we investigate the predictive content of survey-based expectations on investment. In addition, we empirically test the rationality of respondents both in a time series as well as in a panel context. According to our results, based on pooling the data, efficiency is rejected since expectations are biased predictors of actual outcomes. Furthermore, expectations revisions are found to be correlated with components of the information set known at the time of decision making. Finally, our results qualify regressive expectations as the mechanism that more adequately describes the formation of expectations.     

Macroeconomic expectations and time varying heterogeneity:evidence from individual survey data

ABSTRACT

The goal of this paper is to investigate forecast heterogeneity and time variability in the formation of expectations using disaggregated monthly survey data on macroeconomic indicators provided by Bloomberg from June 1998 to August 2017. We show that our panel of forecasters are not rational and are moderately heterogeneous and thus confirm that previously well-established results on asset prices hold for macroeconomic indicators. We propose a flexible hybrid forecast model defined at any time as a combination of the extrapolative, regressive, adaptive and interactive heuristics. Controlling for endogenous structural breaks, we find that experts adjust their forecast behaviour at any time with some inertia in extrapolative and adaptive profiles. Changes in the formation of expectations are triggered mostly by financial shocks, and uncertainty is dealt with by using complex processes in which the fundamentalist component overweighs chartist activity. Forecasters whose models combine different relevant rules and display high temporal flexibility provide the most accurate forecasts. Authorities can then stabilize the domestic markets by encouraging fundamentalists’ forecasts through increased transparency policy.     

The formation of expectations: Some evidence from weekly money supply forecasts

This paper investigates the expectations formation process of weekly money supply forecasts derived from survey data. The evidence indicates that forecaster's expectations are modelled best as regressive. Moreover, the results are unaffected by the October 1979 change in monetary operating procedures.     

Natural capital, subjective well-being, and the new welfare economics of sustainability: Some evidence from cross-country regressions

The measurement of natural capital and its management during the economic development process are important aspects of the capital approach to sustainable development. However, the assessment of social welfare in terms of genuine savings (or changes in total wealth per capita) is arguably too limited. This paper tries to make a case for the incorporation of subjective well-being measures in debates about sustainable development by exploring the macro-level relationship between subjective well-being and natural capital in a cross-country setting. It is tested whether natural capital per capita is correlated with subjective well-being in a sample of fifty-eight developed and developing countries, using natural capital data from the World Bank's Millennium Capital Assessment. Bivariate regressions indicate that it is. When multiple regression models are estimated that include (a) major country-level determinants of subjective well-being (GNI per capita, social capital, income distribution, unemployment, inflation), and (b) regional dummy variables for ex-Soviet Union and Latin American countries, the positive correlation remains. The role of data outliers is carefully explored, and the sensitivity of the results to the use of alternative subjective well-being measures (i.e. life satisfaction, happiness, and a combined life satisfaction and happiness index) is investigated. This does not change the nature of the results. The findings arguably strengthen the case for a ‘new welfare economics of sustainability’ that takes subjective well-being measures into account.     

Individual-rational and group-rational inflation expectations: Theory and cross-section evidence

A distinction is drawn between individual-rational and group-rational inflation expectations. Survey data for Israel show that individual inflation expectations are influenced by socioeconomic and psychological variables — specifically, interpersonal trust, age and income.     

Intertemporal consumption with directly measured welfare functions and subjective expectations

Euler equation estimation of intertemporal consumption models requires many, often unverifiable assumptions. These include assumptions on expectations and preferences. We aim at reducing some of these requirements by using direct subjective information on respondents’ preferences and expectations. The results suggest that individually measured welfare functions and expectations have predictive power for the variation in consumption across households. Furthermore, estimates of the intertemporal elasticity of substitution based on the estimated welfare functions are plausible and of a similar order of magnitude as other estimates found in the literature. The model favored by the data only requires cross-section data for estimation.     

Housing deprivation and health status: evidence from Spain

Living in inadequate housing conditions not only supposes a failure of a basic functioning. It also has effects on other essential aspects of well-being such as health. This study questions to what extent living in poor housing conditions can determine individuals’ health status once the possible influence of other factors is controlled for. By estimating a logistic model with individual effects and a housing deprivation index based on a latent variable model, we reach a number of relevant conclusions concerning the relationship between these two different dimensions of multidimensional well-being. We find a negative effect of housing deprivation on the individuals’ health, both when housing conditions are introduced in a disaggregated manner in the model and when they are combined in a latent variable.     

Unexpected windfalls,education, and mental health: evidence from lottery winners in Germany

This paper investigates the causal impact of large unexpected windfalls on individual mental health, physical health, as well as health behaviors. I use a large individual-level panel data set of lottery winners from Germany between the years 2000 and 2011 and observe lottery winners before and after winning a large lottery prize. Mental health declines immediately after winning a large lottery prize for individuals with low education and low levels of financial literacy. While these individuals report being happier after winning the lottery, evidence from commonly used SF-12 measures of mental health indicates that winners with low education experience increased role limitations due to emotional problems, are more anxious, and have less energy after their win. The impact on various measures of mental health is highly robust, statistically significant, economically significant, and persists for up to two years after the win. Unexpected windfalls have no impact on the mental health of individuals with high education or high financial literacy. Winning the lottery has no impact on individuals’ health behaviors such as smoking or alcohol consumption, and it has no impact on doctor visits, hospital stays, or illness-related work absences regardless of education level.     

Quantitative versus qualitative measures of price expectations: The evidence from Australian consumer surveys

This letter analyses price expectations data derived from the quarterly Australian Survey of Consumers. The survey asks both qualitative and quantitative price expectations questions. The information loss arising from using the more readily available qualitative based series as approximations to the quantitative series is assessed. Qualitatively based series are found to greatly exaggerate changes in consumer price expectations in times of high inflation.     

Disagreement in inflation expectations: empirical evidence for Colombia

The literature on expectation disagreements in emerging economies is scarce. This paper examines the disagreements in inflation expectations for the Colombian economy during the 2010–2017 period. We combine empirical tests with an analysis of a monthly survey of expectations of financial analysts in Colombia to obtain valuable evidence to formulate guidelines on the expectations modelling in developing economies. The findings indicate that disagreements present inertia and that inflation volatility increases disagreements. However, the central bank’s stance, as established through a press release, can reduce disagreement. Moreover, if central bank communication is clear and there is a credible inflation target, there tend to be fewer disagreements.     

Formal institutions and subjective well-being: Revisiting the cross-country evidence

A long tradition in economics explores the association between the quality of formal institutions and economic performance. The literature on the relationship between such institutions and happiness is, however, rather limited, and inconclusive. In this paper, we revisit the findings from recent cross-country studies on the institution–happiness association. Our findings suggest that their conclusions are qualitatively rather insensitive to the specific measure of ‘happiness’ used, while the associations between formal institutions and subjective well-being differ among poor and rich countries. Separating different types of institutional quality, we find that in low-income countries the effects of economic–judicial institutions on happiness dominate those of political institutions, while analyses restricted to middle- and high-income countries show strong support for an additional beneficial effect of political institutions. Our results bear important implications that we discuss in the concluding section of the paper.     

Youth labor market expectations and job matching in sub-Saharan Africa: evidence from school-to-work transition surveys

In this paper, we investigate the factors that influence youth labour market expectations and outcomes. We also perform a job matching exercise to understand youth labour market dynamics in Sub-Saharan Africa. Our results show that youth education is an influential factor of youth employment expectations and employment, ceteris paribus. Higher educational attainments have a great impact on expecting and securing better jobs, particularly in the technical and professional fields. Youth with low educational attainments, particularly primary education and lower, have a higher tendency to expect to be employed in occupations with low job complexity. Our results indicate a severe job-skill mismatch in all occupational categories, both before and after the youth’s transition into the labour market. Using education as the only selection criterion, we found that less than 10 per cent of employment expectations match with skills required while 55 per cent and 34 per cent are under or over-educated for the jobs expected, respectively. Over and under education is a notable feature in youth labour markets in Sub-Saharan Africa. About 47 per cent of employed youth in the sample are overqualified for their respective jobs while 28 per cent are under qualified.     

Testing for forward-looking behaviour: evidence from the enactment of smoking restrictions

This paper develops a new test for forward-looking behaviour based on the establishment of public smoking restrictions. Given that the announcement of these restrictions effectively increases the future cost of smoking, we should expect forward-looking smokers to curb their consumption before the restriction is effective due to complementarity between present and future consumption. I perform the estimation using detailed, high-frequency household-level purchase data. The results provide evidence against the forward-looking behaviour of smokers. Households do not reduce their cigarette purchases before announced public smoking restrictions are established; they only do so once the restriction is in effect.     

Subjective probabilistic expectations,household air pollution,and health: Evidence from cooking fuel use patterns in West Bengal,India

An increasing number of empirical studies have investigated the determinants of cooking fuel choice in developing countries, where health risks from household air pollution are one of the most important issues. We contribute to this stream of literature by examining individuals’ subjective probabilistic expectations about health risks when using different types of fuel and their role in cooking fuel usage patterns. We also explore how these patterns, in turn, are associated with health status. Using data collected from 557 rural Indian households, we find that subjective probabilistic expectations of becoming sick from dirty fuel usage are negatively and significantly associated with the fraction of days of dirty fuel usage in households. Concurrently, dirty fuel usage and self-reported health status of the individual being sick are also significantly correlated. We then conduct a policy simulation of information provision regarding the health risks of dirty fuel usage. Our simulation demonstrates that although the provision of information results in statistically significant changes in households’ cooking fuel usage patterns and in individuals’ health status, these changes may be small in size.     

Interior immigration enforcement policy and the subjective well-being of US residents: evidence from secure communities

There were increased efforts to enhance interior enforcement of immigration laws in the United States in recent years. Considering that more interior immigration enforcement measures are going to be proposed in the near future, there is a need to evaluate whether such policy can achieve its objective and imparts some benefits to the population it is supposed to help. In this article, I examine the impact of one of the largest interior immigration enforcement effort – Secure Communities – on the subjective well-being of US residents. The analyses show that there is no evidence that Secure Communities statistically significantly increased the proportion of white or black non-Hispanics reporting that they were satisfied with their life. Evaluated at the mean, at 10% significance level, the results suggest that I can rule out an effect size larger than 0.5% and 1% for white and black non-Hispanics, respectively. Since only a small share of white or black non-Hispanics are foreign-born, this finding suggests that the benefit of Secure Communities to US-born individuals that are coming through an increase in their life satisfaction is not economically large.