Earn more tomorrow: Overconfidence, income expectations and consumer indebtedness∗ Antonia Grohmann,y Lukas Menkhoff,z Christoph Merkle,x and Renke Schmacker{ January 2020 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 expec- tations 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). JEL classification: D14 (Personal Finance), D84 (Expectations), G40 (Behavioral Finance). Keywords: Debt, Consumption, Borrowing, Overconfidence, Income Expectations. ∗We thank for helpful comments Dirk Engelmann, Peter Haan, Frank Heinemann, Dorothea K¨ubler, Camelia Kuhnen, Steffen Meyer, Roel van Veldhuizen, Georg Weizs¨acker, and participants of the Experi- mental Finance 2018, the ESA 2018 World Meeting, the Research in Behavioral Finance Conference 2018, the SAFE Household Finance Workshop 2018, and seminar participants in Aalborg, Berlin, and Dublin. Financial support by the German Research Foundation (DFG, grant CRC 190) is gratefully acknowledged. yDIW Berlin, Mohrenstrasse 58, 10117 Berlin, Germany,
[email protected]. zDIW Berlin, Mohrenstrasse 58, 10117 Berlin, Germany, lmenkhoff@diw.de, and Humboldt University Berlin. xAarhus University BSS, Fuglesangs All´e4, 8210 Aarhus, Denmark,
[email protected].