Working Paper: NBER ID: w22257
Authors: 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.
Keywords: Job Search; Unemployment Insurance; Behavioral Economics; Reference Dependence
JEL Codes: D03; J64; J65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reform in Hungary's unemployment insurance system (J65) | hazard rates into employment (C41) |
| higher initial search effort following job loss (J65) | diminishing search effort as they adapt to lower income levels (D12) |
| anticipated benefit cuts (J32) | increased hazard rates (C41) |
| psychological impact of loss utility (G41) | spike in exit rates just before benefit exhaustion (J65) |
| loss aversion (G41) | higher initial search effort following job loss (J65) |
| referencedependent model (C20) | persistent differences in hazard rates post-benefit exhaustion (C41) |
| significant loss aversion and slow-adjusting reference point (G41) | search behavior (D83) |