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Risk Aversion and Reservation Wages

  • Markus Pannenberg
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    This study examines the relationship between individual risk aversion and reservation wages using a novel set of direct measures of individual risk attitudes from the German Socio-Economic Panel (SOEP). We find that risk aversion has a significantly negative impact on the level of reservation wages. Moreover, we show that the elasticity of the reservation wage with respect to unemployment benefits is remarkably lower for risk-averse job seekers than for risk-loving job seekers. The results are consistent with an interpretation that risk-averse job seekers set their reservation wage levels sufficiently low, so that they accept almost every job offer.

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    File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.57395.de/diw_sp0023.pdf
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    Paper provided by DIW Berlin, The German Socio-Economic Panel (SOEP) in its series SOEPpapers on Multidisciplinary Panel Data Research with number 23.

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    Length: 19 + Anh. p.
    Date of creation: 2007
    Date of revision:
    Handle: RePEc:diw:diwsop:diw_sp23
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    Web page: http://www.diw.de/en/soep
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    1. Eckstein, Zvi & van den Berg, Gerard J, 2004. "Empirical Labour Search: A Survey," CEPR Discussion Papers 4199, C.E.P.R. Discussion Papers.
    2. Dohmen, Thomas J & Falk, Armin & Huffman, David & Schupp, Jürgen & Sunde, Uwe & Wagner, Gert Georg, 2006. "Individual Risk Attitudes: New Evidence from a Large, Representative, Experimentally-Validated Survey," CEPR Discussion Papers 5517, C.E.P.R. Discussion Papers.
    3. Bloemen, H.G. & Stancanelli, E.G.F., 1997. "Individual Wealth, Reservation Wages and Transitions into Employment," Discussion Paper 1997-02, Tilburg University, Center for Economic Research.
    4. Armin Falk & Ernst Fehr & Christian Zehnder, . "The Behavioral Effects of Minimum Wages," IEW - Working Papers 247, Institute for Empirical Research in Economics - University of Zurich.
    5. Lancaster, Tony & Chesher, Andrew, 1983. "An Econometric Analysis of Reservation Wages," Econometrica, Econometric Society, vol. 51(6), pages 1661-76, November.
    6. Gert G. Wagner & Joachim R. Frick & Jürgen Schupp, 2007. "The German Socio-Economic Panel Study (SOEP): Scope, Evolution and Enhancements," SOEPpapers on Multidisciplinary Panel Data Research 1, DIW Berlin, The German Socio-Economic Panel (SOEP).
    7. Addison, John T. & Centeno, Mario & Portugal, Pedro, 2008. "Unemployment Benefits and Reservation Wages: Key Elasticities from a Stripped-Down Job Search Approach," IZA Discussion Papers 3357, Institute for the Study of Labor (IZA).
    8. Jeffrey M. Wooldridge, 1999. "Asymptotic Properties of Weighted M-Estimators for Variable Probability Samples," Econometrica, Econometric Society, vol. 67(6), pages 1385-1406, November.
    9. repec:iab:iabzaf:v:40:i:1:p:45-64 is not listed on IDEAS
    10. Jones, Stephen R G, 1988. "The Relationship between Unemployment Spells and Reservation Wages as a Test of Search Theory," The Quarterly Journal of Economics, MIT Press, vol. 103(4), pages 741-65, November.
    11. Gerard J. van den Berg & Bas van der Klaauw, 2006. "Counseling And Monitoring Of Unemployed Workers: Theory And Evidence From A Controlled Social Experiment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 895-936, 08.
    12. Richard Rogerson & Robert Shimer & Randall Wright, 2004. "Search-Theoretic Models of the Labor Market-A Survey," NBER Working Papers 10655, National Bureau of Economic Research, Inc.
    13. Eswar Prasad, 2003. "What Determines the Reservation Wages of Unemployed Workers? New Evidence From German Micro Data," IMF Working Papers 03/4, International Monetary Fund.
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