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Econometric Explorations on Bounded Rationality: The Case of Job Changing Behavior

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  • Contini, Bruno

    ()
    (LABORatorio R. Revelli)

  • Morini, Matteo

    ()
    (LABORatorio R. Revelli)

Abstract

In this paper we question the hypothesis of full rationality in the context of job changing behavior, via simple econometric explorations on microdata drawn from WHIP (Worker Histories Italian Panel). A rational outcome of the job matching process implies a positive tradeoff between future wages and risk-on-the-job. The main result of this paper is that no “rational” tradeoff is observable after controlling for a variety of possible shifters. However, if we control for individual characteristics and replace wage growth by its predictor net of individual effects, the picture changes with the emergence of a significantly positive tradeoff between wage growth and risk-on-the-job. The interpretation is suggestive: while market forces (net of individual effects) drive towards a rational outcome, individual characteristics, instead of reinforcing the “rationality” of a positive tradeoff, lead towards the opposite direction of confounding good and bad options. Our explanation for these findings is that people act on the basis of bounded rationality à la Simon. If our assessment is correct, the implications are powerful: are there reasons to believe that such patterns are found only in the context of job search and worker mobility and not in other instances of economic behavior? Recent literature on bounded rationality strongly suggests the contrary. Why, then, should economists leave unchallenged and unchallengeable the hypothesis of full rationality? Had our investigation aimed at estimating the elasticities of wage growth and job safety of the workers’ utilities, we would have miserably failed. Is this a consequence of a misspecified model or of the wrong behavioral assumptions? Our support unquestionably goes to the latter.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2631.

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Length: 34 pages
Date of creation: Feb 2007
Date of revision:
Handle: RePEc:iza:izadps:dp2631

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Keywords: job mobility; bounded rationality; risk on the job;

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  1. Akerlof, George A & Dickens, William T, 1982. "The Economic Consequences of Cognitive Dissonance," American Economic Review, American Economic Association, vol. 72(3), pages 307-19, June.
  2. Charles Brown & James L. Medoff, 1989. "The Employer Size-Wage Effect," NBER Working Papers 2870, National Bureau of Economic Research, Inc.
  3. Arrow, Kenneth J, 1986. "Rationality of Self and Others in an Economic System," The Journal of Business, University of Chicago Press, vol. 59(4), pages S385-99, October.
  4. Ashenfelter, O. & Genesove, D., 1992. "Testing for Price Anomalies in real Estate Auctions," Papers 128, Princeton, Department of Economics - Financial Research Center.
  5. Akerlof, George A, 1991. "Procrastination and Obedience," American Economic Review, American Economic Association, vol. 81(2), pages 1-19, May.
  6. Simon, Herbert A, 1993. "Altruism and Economics," American Economic Review, American Economic Association, vol. 83(2), pages 156-61, May.
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