Examining Income Expectations in the College and Early Post-College Periods: New Distributional Tests of Rational Expectations

Abstract

Abstract Using unique longitudinal probabilistic expectations data from the Berea Panel Study, which cover both college and early post-college periods, we examine young adults’ beliefs about their future incomes. We introduce two new approaches to testing whether, ex ante, agents exhibit Rational Expectations. We show that taking into account the additional information about higher moments of individual belief distributions contained in probabilistic expectations data reveals violations of Rational Expectations that are not detected by existing mean-based tests. Empirically, we find that our subjects underestimate the level of uncertainty they face about future incomes.