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Learning and Smooth Stopping

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  • Mason, Robin
  • Välimäki, Juuso

Abstract

We propose a simple model of optimal stopping where the economic environment changes as a result of learning. A primary application of our framework is an optimal job search problem when the worker's labour market opportunities are initially uncertain. We distinguish between two interpretations of the model. In the first, a worker learns about common market conditions, such as the number of potential employers, that affect all searchers. In the second, the worker learns about her idiosyncratic productivity distribution across firms. For the first model, we show that learning leads to higher wage demands by the workers. In the second model, we give sufficient conditions so that learning leads to higher wage demands for optimistic workers and lower demands for pessimistic workers due to learning.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6623.

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Date of creation: Jan 2008
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Handle: RePEc:cpr:ceprdp:6623

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Keywords: learning; stopping;

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  1. François Ortalo-Magné & Antonio Merlo, 2002. "Bargaining over Residential Real Estate: Evidence from England," Wisconsin-Madison CULER working papers 02-02, University of Wisconsin Center for Urban Land Economic Research.
  2. Lancaster, Tony & Chesher, Andrew, 1983. "An Econometric Analysis of Reservation Wages," Econometrica, Econometric Society, vol. 51(6), pages 1661-76, November.
  3. Lones Smith, 1995. "Optimal Job Search in a Changing World," Working papers 95-3, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Burdett, Kenneth & Vishwanath, Tara, 1988. "Declining Reservation Wages and Learning," Review of Economic Studies, Wiley Blackwell, vol. 55(4), pages 655-65, October.
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