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Reference-Dependent Job Search: Evidence from Hungary

Author

Listed:
  • Stefano DellaVigna
  • Attila Lindner
  • Balázs Reizer
  • Johannes F. Schmieder

Abstract

We propose a model of job search with reference-dependent preferences, where the reference point is given by recent income. Newly unemployed individuals search hard given that they are at a loss, but over time they get used to lower income, and thus reduce their search effort. In anticipation of a benefit cut their search effort rises again, then declines once they get used to the lower benefit level. The model fits the typical pattern of the exit from unemployment, even with no unobserved heterogeneity. The model also makes distinguishing predictions regarding the response to benefit changes, which we evaluate using a unique reform. In 2005, Hungary switched from a single-step UI system to a two-step system, with unchanged overall generosity. The system generated increased hazard rates in anticipation of, and especially following, benefit cuts in ways the standard model has a hard time explaining. We estimate a model with optimal consumption and endogenous search effort, as well as unobserved heterogeneity. The reference-dependent model fits the hazard rates substantially better than most versions of the standard model. We estimate a slow-adjusting reference point and substantial impatience, likely reflecting present-bias. Habit formation and a variety of alternative models do not match the fit of the reference-dependent model. We discuss one model which also fits well, but is at odds with calibrated values and other evidence.

Suggested Citation

  • Stefano DellaVigna & Attila Lindner & Balázs Reizer & Johannes F. Schmieder, 2016. "Reference-Dependent Job Search: Evidence from Hungary," NBER Working Papers 22257, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:22257
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    References listed on IDEAS

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    1. Fougère, Denis & Pradel, Jacqueline & Roger, Muriel, 2009. "Does the public employment service affect search effort and outcomes?," European Economic Review, Elsevier, vol. 53(7), pages 846-869, October.
    2. Hans G. Bloemen, 2005. "Job Search, Search Intensity, and Labor Market Transitions: An Empirical Analysis," Journal of Human Resources, University of Wisconsin Press, vol. 40(1).
    3. Jan Boone & Jan Ours, 2012. "Why is There a Spike in the Job Finding Rate at Benefit Exhaustion?," De Economist, Springer, vol. 160(4), pages 413-438, December.
    4. Thierry Post & Martijn J. van den Assem & Guido Baltussen & Richard H. Thaler, 2008. "Deal or No Deal? Decision Making under Risk in a Large-Payoff Game Show," American Economic Review, American Economic Association, vol. 98(1), pages 38-71, March.
    5. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588.
    6. Arash Nekoei & Andrea Weber, 2015. "Recall Expectations and Duration Dependence," American Economic Review, American Economic Association, vol. 105(5), pages 142-146, May.
    7. Johannes F. Schmieder† & Till von Wachter & Stefan Bender, 2011. "The Effects Of Extended Unemployment Insurance Over The Business Cycle: Evidence From Regression Discontinuity Estimates Over Twenty Years," Boston University - Department of Economics - Working Papers Series WP2011-063, Boston University - Department of Economics.
    8. Botond Kőszegi & Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, Oxford University Press, vol. 121(4), pages 1133-1165.
    9. Johannes F. Schmieder & Till von Wachter & Stefan Bender, 2012. "The Effects of Extended Unemployment Insurance Over the Business Cycle: Evidence from Regression Discontinuity Estimates Over 20 Years," The Quarterly Journal of Economics, Oxford University Press, vol. 127(2), pages 701-752.
    10. Uri Simonsohn & George Loewenstein, 2006. "Mistake #37: The Effect of Previously Encountered Prices on Current Housing Demand," Economic Journal, Royal Economic Society, vol. 116(508), pages 175-199, January.
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    More about this item

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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