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Unemployment Risk and the Distribution of Assets

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  • Jan Eeckhout

    (University College London and GSE-UPF)

Abstract

How does the distribution of assets affect job search decisions? We analyze unemployed workers and how their asset holdings affect the allocation to jobs of different productivity. In the absence of insurance, workers with low asset holdings direct their search to low productivity jobs because they offer a low wage and low risk. We show that this occurs under a condition closely related to Decreasing Relative Risk Aversion. There is perfect segregation of asset holders into job productivities even when assets holdings are private. We also find that for a given worker, the productivity of jobs she applies for is decreasing in the duration of unemployment. As assets gradually deplete, she takes more secure, low wage jobs. When workers are heterogeneous in skills, there is a trade off between wages and insurance. The skilled but poor worker will necessarily go for the less ambitious, low wage job in order to hedge risk.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 337.

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Date of creation: 2013
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Handle: RePEc:red:sed013:337

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  1. Jan Eeckhout & Philipp Kircher, 2008. "Sorting and Decentralized Price Competition," PIER Working Paper Archive 08-020, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  2. Patrick Legros & Andrew F. Newman, 2007. "Beauty Is a Beast, Frog Is a Prince: Assortative Matching with Nontransferabilities," Econometrica, Econometric Society, vol. 75(4), pages 1073-1102, 07.
  3. Mikhail Golosov & Pricila Maziero & Guido Menzio, 2012. "Taxation and Redistribution of Residual Income Inequality," NBER Working Papers 18151, National Bureau of Economic Research, Inc.
  4. McAfee, R Preston, 1993. "Mechanism Design by Competing Sellers," Econometrica, Econometric Society, vol. 61(6), pages 1281-1312, November.
  5. Kaneko, Mamoru, 1982. "The central assignment game and the assignment markets," Journal of Mathematical Economics, Elsevier, vol. 10(2-3), pages 205-232, September.
  6. Robert Shimer & Iván Werning, 2007. "Reservation Wages and Unemployment Insurance," The Quarterly Journal of Economics, MIT Press, vol. 122(3), pages 1145-1185, 08.
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