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The Reservation Wage under CARA and Limited Borrowing

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  • Bauer, Christian

Abstract

A continuous-time sequential job search model with savings and CARA preferences is solved analytically without resorting to unlimited borrowing and real-valued consumption. I isolate the effects of limited borrowing and nonnegative consumption as well as risk-aversion on the reservation wage by using a system of ordinary differential equations.

Suggested Citation

  • Bauer, Christian, 2009. "The Reservation Wage under CARA and Limited Borrowing," Discussion Papers in Economics 10291, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenec:10291
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    References listed on IDEAS

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    1. Rendon Sílvio, 2006. "Job Search And Asset Accumulation Under Borrowing Constraints ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(1), pages 233-263, February.
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    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. Sennewald, Ken, 2007. "Controlled stochastic differential equations under Poisson uncertainty and with unbounded utility," Journal of Economic Dynamics and Control, Elsevier, vol. 31(4), pages 1106-1131, April.
    6. Ken Sennewald & Klaus Wälde, 2006. "“Itô's Lemma” and the Bellman Equation for Poisson Processes: An Applied View," Journal of Economics, Springer, vol. 89(1), pages 1-36, October.
    7. Robert Shimer & Ivan Werning, 2008. "Liquidity and Insurance for the Unemployed," American Economic Review, American Economic Association, vol. 98(5), pages 1922-1942, December.
    8. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
    9. Elena Stancanelli, 1999. "Do the Rich Stay Unemployed Longer? An Empirical Study for the UK," PSE-Ecole d'économie de Paris (Postprint) hal-03417570, HAL.
    10. Elena Stancanelli, 1999. "Do the Rich Stay Unemployed Longer? An Empirical Study for the UK," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-03417570, HAL.
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    12. Robert Shimer & Iván Werning, 2007. "Reservation Wages and Unemployment Insurance," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(3), pages 1145-1185.
    13. Hans G. Bloemen & Elena G. F. Stancanelli, 2005. "Financial Wealth, Consumption Smoothing and Income Shocks Arising from Job Loss," Economica, London School of Economics and Political Science, vol. 72(287), pages 431-452, August.
    14. Elena G. F. Stancanelli, 1999. "Do the Rich Stay Unemployed Longer? An Empirical Study for the UK," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(3), pages 295-314, August.
    15. Bloemen, Hans G & Stancanelli, Elena G F, 2001. "Individual Wealth, Reservation Wages, and Transitions into Employment," Journal of Labor Economics, University of Chicago Press, vol. 19(2), pages 400-439, April.
    16. Browning, Martin & Crossley, Thomas F., 2001. "Unemployment insurance benefit levels and consumption changes," Journal of Public Economics, Elsevier, vol. 80(1), pages 1-23, April.
    17. Raj Chetty, 2008. "Erratum: Moral Hazard versus Liquidity and Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 116(6), pages 1197-1197, December.
    18. repec:hal:wpspec:info:hdl:2441/9704 is not listed on IDEAS
    19. James X. Sullivan, 2008. "Borrowing During Unemployment: Unsecured Debt as a Safety Net," Journal of Human Resources, University of Wisconsin Press, vol. 43(2), pages 383-412.
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    21. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-257, August.
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    Cited by:

    1. S. Nuray Akin & Brennan Platt, 2012. "Running Out of Time: Limited Unemployment Benefits and Reservation Wages," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 149-170, April.

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    More about this item

    Keywords

    labor income risk; wealth-dependent reservation wage; borrowing limit;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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