Abstract

This paper aims to deepen our understanding how households' consumption-savings decisions are shaped by their earnings expectations. Using the Italian Household Survey of Income and Wealth, we document that households' consumption expenditures depend on their individual earnings expectations -- even after conditioning on realized earnings and wealth. To rationalize this novel fact, we develop a standard-incomplete markets model in which households receive private signals on their future earnings realizations. We use indirect inference to structurally estimate the model. Households are better informed about their future earnings than an econometrician and individual expectations are more relevant for the consumption choices of households in the left tail of the wealth distribution. Furthermore, better informed households prefer less progressive earnings taxes.