Inflated Expectations and Natural Resource Booms

OxCarre WP: In this paper we identify the e ect 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 aff ecting households located in the oil and gas rich region of Kazakhstan. To evaluate the eff ect we use the Household Budget Survey of Kazakhstan from 2001 to 2005, a quarterly, unbalanced panel of 12000 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.