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Job Search and Savings: Wealth Effects and Duration Dependence

  • Rasmus Lentz

    (Boston University)

  • Torben Tranæs

    (Rockwool Foundation Research Unit, Copenhagen)

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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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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Web page: http://www.econ.ku.dk/CAM/
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  1. Christopher Phelan & Robert M Townsend, 2010. "Computing Multi-Period, Information Constrained Optima," Levine's Working Paper Archive 117, David K. Levine.
  2. van den Berg, G. & van Ours, J.C., 1996. "Unemployment dynamics and duration dependence," Other publications TiSEM 4374742f-8d86-458d-9ab3-6, Tilburg University, School of Economics and Management.
  3. Wang, Cheng & Williamson, Stephen D., 2002. "Moral hazard, optimal unemployment insurance, and experience rating," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1337-1371, October.
  4. Daron Acemoglu & Robert Shimer, 1999. "Efficient Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 893-928, October.
  5. Christopher Phelan & Robert M. Townsend, 1991. "Computing Multi-Period, Information-Constrained Optima," Review of Economic Studies, Oxford University Press, vol. 58(5), pages 853-881.
  6. Kenneth Burdett & Dale T. Mortensen, 1977. "Labor Supply Under Uncertainty," Discussion Papers 297, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. J. J. McCall, 1970. "Economics of Information and Job Search," The Quarterly Journal of Economics, Oxford University Press, vol. 84(1), pages 113-126.
  8. Hopenhayn, H. & Nicolini, P.J., 1996. "Optimal Unemployment Insurance," RCER Working Papers 421, University of Rochester - Center for Economic Research (RCER).
  9. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
  10. Peter A. Diamond, 1982. "Wage Determination and Efficiency in Search Equilibrium," Review of Economic Studies, Oxford University Press, vol. 49(2), pages 217-227.
  11. Browning, M. & Crossley, T., 1999. "Shocks, Stocks and Socks: Consumption Smoothing and the Replacement of Durables During an Unemployment Spell," Papers 376, Australian National University - Department of Economics.
  12. Bruce D. Meyer, 1988. "Unemployment Insurance And Unemployment Spells," NBER Working Papers 2546, National Bureau of Economic Research, Inc.
  13. Dale T. Mortensen, 1977. "Unemployment Insurance and Job Search Decisions," ILR Review, Cornell University, ILR School, vol. 30(4), pages 505-517, July.
  14. Steven Shavell & Laurence Weiss, 1978. "The Optimal Payment of Unemployment Insurance Benefits over Time," Cowles Foundation Discussion Papers 503, Cowles Foundation for Research in Economics, Yale University.
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