Inflated Expectations and Natural Resource Booms: Evidence from Kazakhstan

New OxCarre paper by Toews: In this paper we identify the effect of an oil price boom on households' satisfaction with income. In a natural experiment the increase in the oil price is used as an exogenous shock affecting households located in the oil and gas rich region of Kazakhstan. To evaluate the effect we use the Household Budget Survery of Kazakhstan from 2001 to 2005, a quarterly, unbalanced panel of 12,000 households. An important feature of this survey is that household heads were asked to report their "satisfaction with household income" on a scale from 1 to 5. Our results suggest that a 10% increase in the oil price decreased household's satisfaction with income by 2% with a lag of two quarters. We argue that this is due to peoples' inflated expectations regarding their income. This result highlights the importance of managing expectations in a rapidly changing economic environment.