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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.
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    5. 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.
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    8. 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.
    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.
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    Citations

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    Cited by:

    1. Steffen Altmann & Armin Falk & Simon Jäger & Florian Zimmermann, 2015. "Learning about Job Search: A Field Experiment with Job Seekers in Germany," Working Paper 254671, Harvard University OpenScholar.
    2. Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2015. "Memory, Attention, and Choice," Working Paper 240741, Harvard University OpenScholar.
    3. Andrea Repetto & Alejandro Jofré & Sofía Moroni, 2012. "Dynamic Contracts Under Loss Aversion," Working Papers wp_024, Adolfo Ibáñez University, School of Government.
    4. repec:eee:pubeco:v:164:y:2018:i:c:p:33-49 is not listed on IDEAS
    5. Doerrenberg, Philipp & Duncan, Denvil & Loeffler, Max, 2016. "Asymmetric Labor-Supply Responses to Wage-Rate Changes: Evidence from a Field Experiment," IZA Discussion Papers 9683, Institute for the Study of Labor (IZA).
    6. Abebe, Girum & Caria, Stefano & Fafchamps, Marcel & Falco, Paolo & Franklin, Simon & Quinn, Simon & Shilpi, Forhad, 2017. "Matching firms and workers in a field experiment in Ethiopia," LSE Research Online Documents on Economics 86572, London School of Economics and Political Science, LSE Library.
    7. Yolanda F. Rebollo-Sanz & Nuria Rodriguez Planas, 2016. "When the Going Gets Tough... Financial Incentives, Duration of Unemployment and Job-Match Quality," Working Papers 16.11, Universidad Pablo de Olavide, Department of Economics.
    8. repec:eee:soceco:v:75:y:2018:i:c:p:1-11 is not listed on IDEAS
    9. Jared Rubin & Anya Samek & Roman M. Sheremeta, 2018. "Loss aversion and the quantity–quality tradeoff," Experimental Economics, Springer;Economic Science Association, vol. 21(2), pages 292-315, June.
    10. Barbanchon, Thomas Le & Rathelot, Roland & Roulet, Alexandra, 2017. "Unemployment Insurance and Reservation Wages: Evidence from Administrative Data," CAGE Online Working Paper Series 330, Competitive Advantage in the Global Economy (CAGE).
    11. Koenig, Felix & Manning, Alan & Petrongolo, Barbara, 2014. "Reservation wages and the wage flexibility puzzle," LSE Research Online Documents on Economics 60613, London School of Economics and Political Science, LSE Library.
    12. Raj Chetty, 2015. "Behavioral Economics and Public Policy: A Pragmatic Perspective," American Economic Review, American Economic Association, vol. 105(5), pages 1-33, May.
    13. Corrado Giulietti & Mirco Tonin & Michael Vlassopoulos, 2018. "When the market drives you crazy: Stock market returns and fatal car accidents," BEMPS - Bozen Economics & Management Paper Series BEMPS52, Faculty of Economics and Management at the Free University of Bozen.
    14. Arni, Patrick & Schiprowski, Amelie, 2015. "The Effects of Binding and Non-Binding Job Search Requirements," IZA Discussion Papers 8951, Institute for the Study of Labor (IZA).
    15. Victor H. Aguiar & Roberto Serrano, 2018. "Cardinal Revealed Preference, Price-Dependent Utility, and Consistent Binary Choice," Working Papers 2018-3, Brown University, Department of Economics.
    16. Samuel M. Hartzmark & Kelly Shue, 2017. "A Tough Act to Follow: Contrast Effects In Financial Markets," NBER Working Papers 23883, National Bureau of Economic Research, Inc.
    17. Sascha Drahs & Luke Haywood & Amelie Schiprowski, 2018. "Job Search with Subjective Wage Expectations," Discussion Papers of DIW Berlin 1725, DIW Berlin, German Institute for Economic Research.
    18. repec:ijm:journl:v11:y:2018:i:2:p:146-168 is not listed on IDEAS
    19. Kyyrä, Tomi & Pesola, Hanna & Verho, Jouko Kullervo, 2017. "The Spike at Benefit Exhaustion in the Finnish Labor Market," IZA Discussion Papers 10798, Institute for the Study of Labor (IZA).
    20. Christine L. Exley & Stephen J. Terry, 2015. "Wage Elasticities in Working and Volunteering: The Role of Reference Points in a Laboratory Study," Harvard Business School Working Papers 16-062, Harvard Business School, revised Jun 2017.
    21. Attila Lindner & Balazs Reizer, 2016. "Frontloading the Unemployment Benefit: An Empirical Assessment," IEHAS Discussion Papers 1627, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
    22. Schiprowski, Amelie & Arni, Patrick, 2016. "Strengthening Enforcement in Unemployment Insurance. A Natural Experiment," Annual Conference 2016 (Augsburg): Demographic Change 145723, Verein für Socialpolitik / German Economic Association.
    23. Alberto Alesina & Francesco Passarelli, 2015. "Loss Aversion in Politics," NBER Working Papers 21077, National Bureau of Economic Research, Inc.
    24. Corrado Giulietti & Mirco Tonin & Michael Vlassopoulos, 2018. "When the market drives you crazy: Stock market returns and fatal car accidents," Working Papers 124, "Carlo F. Dondena" Centre for Research on Social Dynamics (DONDENA), Università Commerciale Luigi Bocconi.

    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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