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The Unemployment Volatility Puzzle: a Note on the Role of Reference Points

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  • Vincent Boitier

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    (UP1 UFR02 - Université Paris 1, Panthéon-Sorbonne - UFR d'Économie - Université Paris I - Panthéon-Sorbonne - PRES HESAM)

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    Abstract

    This theoretical note aims at studying the role of reference points in generating unemployment volatility. For this purpose, I introduce the notion of reference points in a standard Mortensen-Pissarides model. I obtain two results. First, I find that the obtained model is similar to the one found by Pissarides (2009) with matching costs. Second, I show that the introduction of reference points can increase significantly unemployment volatility through a mechanism à la Hagerdorn and Manovskii (2008).

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    Bibliographic Info

    Paper provided by HAL in its series Working Papers with number hal-00878107.

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    Date of creation: 29 Oct 2013
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    Handle: RePEc:hal:wpaper:hal-00878107

    Note: View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00878107
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    Related research

    Keywords: Reference points; Unemployment volatility; Job matching;

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    References

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    1. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, December.
    2. Muthoo,Abhinay, 1999. "Bargaining Theory with Applications," Cambridge Books, Cambridge University Press, number 9780521576475, 9.
    3. Hagedorn, Marcus & Manovskii, Iourii, 2008. "The cyclical behavior of equilibrium unemployment and vacancies revisited," Working Paper Series 0853, European Central Bank.
    4. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, Econometric Society, vol. 47(2), pages 263-91, March.
    5. Kyle Hyndman, 2011. "Repeated bargaining with reference-dependent preferences," International Journal of Game Theory, Springer, vol. 40(3), pages 527-549, August.
    6. Eliaz, Kfir & Spiegler, Rani, 2012. "Reference Dependence and Labor-Market Fluctuations," CEPR Discussion Papers 8997, C.E.P.R. Discussion Papers.
    7. Arial Rubinstein & Asher Wolinsky, 1985. "Equilibrium in a Market with Sequential Bargaining," Levine's Working Paper Archive 623, David K. Levine.
    8. Robert Shimer, 2004. "The Consequences of Rigid Wages in Search Models," NBER Working Papers 10326, National Bureau of Economic Research, Inc.
    9. Kambe, Shinsuke, 1999. "Bargaining with Imperfect Commitment," Games and Economic Behavior, Elsevier, vol. 28(2), pages 217-237, August.
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