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Job Search and Hyperbolic Discounting: Structural Estimation and Policy Evaluation

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  • M. Daniele Paserman

Abstract

Job search is an unpleasant activity with immediate costs and delayed benefits. The tension between long-run goals and short-run impulses may lead unemployed workers to postpone repeatedly tasks necessary to find a job. In standard economic models, agents are assumed to be time-consistent, so that a contrast between short-run and long-run preferences never arises. However, a growing literature has challenged the conventional view, and allows agents to be time inconsistent by modeling their discount function as hyperbolic (as opposed to the standard assumption of exponential discounting). Agents with hyperbolic discount functions exhibit a high degree of discounting in the short run, but a relatively low degree of discounting in the long run. Therefore, hyperbolic agents are likely to delay tasks with immediate costs and delayed benefits, whereas they would choose to perform the same task if both costs and benefits were to occur in the future. This paper estimates the structural parameters of a job search model with hyperbolic discounting and endogenous search effort. It estimates quantitatively the degree of hyperbolic discounting, and assesses its implications for the impact of various policy interventions aimed at reducing unemployment. The model is estimated using data on unemployment spells and accepted wages from the National Longitudinal Survey of Youth (NLSY). The likelihood function explicitly incorporates all the restrictions implied by the optimal dynamic programming solution to the model, and also accounts for both observed and unobserved heterogeneity. The parameters of the hyperbolic discount function are separately identified because different forms of discounting have contrasting effects on the different components of the job search process. The results point to a substantial degree of hyperbolic discounting, especially for low and medium wage workers. The structural estimates are also used to evaluate alternative policy interventions for the unemployed: a cut in unemployment benefits, a job search assistance program, monitoring search effort, monitoring the job acceptance strategy, and a re-employment bonus. I find that ignoring hyperbolic preferences may lead one to incorrect inferences on the effects of these interventions.

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Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 99.

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Date of creation: 2004
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Handle: RePEc:red:sed004:99

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Keywords: Job Search; Hyperbolic Discounting; Structural Estimation;

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