Estimating Individual Responses when Tomorrow Matters

Author:

Stephane Bonhomme, Angela Denis

Keyword:

Economics, Econometrics, Econometrics (econ.EM)

journal:

date:

2023-10-12 16:00:00

Abstract

We propose a regression-based approach to estimate how individuals' expectations influence their responses to a counterfactual change. We provide conditions under which average partial effects based on regression estimates recover structural effects. We propose a practical three-step estimation method that relies on subjective beliefs data. We illustrate our approach in a model of consumption and saving, focusing on the impact of an income tax that not only changes current income but also affects beliefs about future income. By applying our approach to survey data from Italy, we find that considering individuals' beliefs matter for evaluating the impact of tax policies on consumption decisions.

PDF: Estimating Individual Responses when Tomorrow Matters.pdf