Expectations in Micro Data: Rationality Revisited

An increasing number of longitudinal data sets collect expectations information regarding a variety of future individual level events and decisions, providing researchers with the opportunity to explore expectations over micro variables in detail. We present a theoretical framework and an econometric methodology to use that type of information to test the Rational Expectations (RE) hypothesis in models of individual behavior. This RE assumption at the micro level underlies a majority of the research in applied fields in economics, and it is the common foundation of most work in dynamic models of individual behavior. We present tests of three different types of expectations using two different panel data sets that represent two very different populations. In all three cases we cannot reject the RE hypothesis. Our results support a wide variety of models in economics, and other disciplines, that assume rational behavior.