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Good News and Bad News: Search from Unknown Wage Offer Distributions

  • James Cox
  • Ronald Oaxaca

The largest market in national economies is the labor market. Labor market contracting is characterized by job search, often from unknown wage offer distributions. This paper reports experimental tests of finite horizon models of job search in which the wage offer distribution is unknown. Theoretically-optimal search from an unknown wage offer distribution can have the seemingly paradoxical property that some offers will be accepted that are lower than other offers that will be rejected in the same period of the search horizon. Thus the reservation wage property (or lowest acceptable wage path) may not exist. This can occur because an offer that is a priori relatively high (“good newsâ€) can imply that it is highly probable that search is from a favorable distribution, and such an offer can look unattractive when it is an a posteriori relatively low offer from a favorable distribution (“bad newsâ€). This paper reports results from experimental treatments for search from unknown distributions in which the reservation wage property does exist and treatments in which it does not exist. We find that the consistency of search behavior with search theory reported in earlier papers is robust to the presence or absence of the reservation wage property and to whether the draws come from known or unknown distributions. Copyright Kluwer Academic Publishers 2000

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File URL: http://hdl.handle.net/10.1023/A:1009910627375
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Article provided by Springer in its journal Experimental Economics.

Volume (Year): 2 (2000)
Issue (Month): 3 (March)
Pages: 197-225

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Handle: RePEc:kap:expeco:v:2:y:2000:i:3:p:197-225
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  1. Grether, David M & Schwartz, Alan & Wilde, Louis L, 1988. "Uncertainty and Shopping Behaviour: An Experimental Analysis," Review of Economic Studies, Wiley Blackwell, vol. 55(2), pages 323-42, April.
  2. Hey, John D., 1982. "Search for rules for search," Journal of Economic Behavior & Organization, Elsevier, vol. 3(1), pages 65-81, March.
  3. Hey, John D., 1987. "Still searching," Journal of Economic Behavior & Organization, Elsevier, vol. 8(1), pages 137-144, March.
  4. Cox, James C & Oaxaca, Ronald L, 1992. "Direct Tests of the Reservation Wage Property," Economic Journal, Royal Economic Society, vol. 102(415), pages 1423-32, November.
  5. Kogut, Carl A., 1992. "Recall in consumer search," Journal of Economic Behavior & Organization, Elsevier, vol. 17(1), pages 141-151, January.
  6. Devine, Theresa J. & Kiefer, Nicolas M., 1991. "Empirical Labor Economics: The Search Approach," OUP Catalogue, Oxford University Press, number 9780195059366, March.
  7. Braunstein, Yale M & Schotter, Andrew, 1982. "Labor Market Search: An Experimental Study," Economic Inquiry, Western Economic Association International, vol. 20(1), pages 133-44, January.
  8. Harrison, Glenn W & Morgan, Peter, 1990. "Search Intensity in Experiments," Economic Journal, Royal Economic Society, vol. 100(401), pages 478-86, June.
  9. Schotter, Andrew & Braunstein, Yale M, 1981. "Economic Search: An Experimental Study," Economic Inquiry, Western Economic Association International, vol. 19(1), pages 1-25, January.
  10. Cox, James C & Oaxaca, Ronald L, 1989. " Laboratory Experiments with a Finite-Horizon Job-Search Model," Journal of Risk and Uncertainty, Springer, vol. 2(3), pages 301-29, September.
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