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Job Search and Savings: Wealth Effects and Duration Dependence

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  • Rasmus Lentz

    (Boston University)

  • Torben Tranæs

    (Rockwool Foundation Research Unit, Copenhagen)

Abstract

In this paper we study a risk averse worker's optimal savings and job-search behavior as she moves back and forth between employment and unemployment. Recent empirical findings suggest a negative association between a risk averse worker's search effort and wealth. We show that additively separable utility and bounded wealth imply that job search is negatively affected by wealth, and characterize the worker's consumption paths and wealth formation under these conditions. In general, all decisions will depend on the current level of wealth. Furthermore, given optimal search, savings still provide imperfect insurance against income fluctuations; precautionary savings are built up during employment spells and run down during unemployment spells but the consumption path is never going to be completely smooth over states. Finally, our results suggests that wealth introduces an element of positive duration dependence to the probability of leaving unemployment.

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File URL: http://www.econ.ku.dk/cam/wp0910/wp0203/2004-11.pdf/
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Bibliographic Info

Paper provided by University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics in its series CAM Working Papers with number 2004-11.

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Length: 23 pages
Date of creation: Jan 2002
Date of revision: Nov 2003
Handle: RePEc:kud:kuieca:2004_11

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Keywords: Search; Consumption Smoothing; Duration Dependence;

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References

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  1. Berg, G.J. & Ours, J.C., 1993. "Unemployment dynamics and duration dependence," Serie Research Memoranda, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics 0022, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
  2. Daron Acemoglu & Robert Shimer, 1998. "Efficient Unemployment Insurance," NBER Working Papers 6686, National Bureau of Economic Research, Inc.
  3. Shavell, Steven & Weiss, Laurence, 1979. "The Optimal Payment of Unemployment Insurance Benefits over Time," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(6), pages 1347-62, December.
  4. McCall, John J, 1970. "Economics of Information and Job Search," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 84(1), pages 113-26, February.
  5. Meyer, Bruce D, 1990. "Unemployment Insurance and Unemployment Spells," Econometrica, Econometric Society, Econometric Society, vol. 58(4), pages 757-82, July.
  6. Dale T. Mortensen, 1977. "Unemployment insurance and job search decisions," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 30(4), pages 505-517, July.
  7. Browning, M. & Crossley, T., 1999. "Shocks, Stocks and Socks: Consumption Smoothing and the Replacement of Durables During an Unemployment Spell," ANU Working Papers in Economics and Econometrics, Australian National University, College of Business and Economics, School of Economics 1999-376, Australian National University, College of Business and Economics, School of Economics.
  8. Kenneth Burdett & Dale T. Mortensen, 1977. "Labor Supply Under Uncertainty," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 297, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Diamond, Peter A, 1982. "Wage Determination and Efficiency in Search Equilibrium," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 49(2), pages 217-27, April.
  10. Wang, Cheng & Williamson, Stephen D., 2002. "Moral Hazard, Optimal Unemployment Insurance and Experience Rating," Staff General Research Papers, Iowa State University, Department of Economics 10133, Iowa State University, Department of Economics.
  11. Phelan, Christopher & Townsend, Robert M, 1991. "Computing Multi-period, Information-Constrained Optima," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(5), pages 853-81, October.
  12. Hopenhayn, Hugo A & Nicolini, Juan Pablo, 1997. "Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 105(2), pages 412-38, April.
  13. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers, Federal Reserve Bank of Minneapolis 502, Federal Reserve Bank of Minneapolis.
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