Job Search David L. Dickinson Appalachian State University April 2006: GATE.

“Direct tests of the reservation wage property.” J.C. Cox and R. L. Oaxaca, 1992, The EJ. Job Search models depend critically on an individual’s reservation wage Search duration or accepted wage data is an indirect test of the finite horizon model. Search duration or accepted wage data is an indirect test of the finite horizon model. Direct tests require data on reservation wages themselves…..not observable in field data. Direct tests require data on reservation wages themselves…..not observable in field data. Is reservation wage data from lab consistent with job search model predictions? For risk neutral/risk averse agents? Can a naïve decision rule predict just as well? Is reservation wage data from lab consistent with job search model predictions? For risk neutral/risk averse agents? Can a naïve decision rule predict just as well?

Experimental Institution Subjects state minimum acceptable offers with binding pre-commitment (part II). Part I trials are more field-parallel accept/reject responses of known offers to identify any institutional (pre-commitment effects). Part I trials are more field-parallel accept/reject responses of known offers to identify any institutional (pre-commitment effects). Trials (rounds) in both parts I and II differ by: Offer probability (1/2 or 1/4)…finite horizon Offer probability (1/2 or 1/4)…finite horizon “Unemployment” insurance (i.e., search subsidy)=$0 or $.05 per round. “Unemployment” insurance (i.e., search subsidy)=$0 or $.05 per round.

Tests Pre-commitment treatment effect? Yes, but it’s gone after 1 st two treatments Yes, but it’s gone after 1 st two treatments Search Model vs. Naïve Rule Even naïve rule does well when theory is tested indirectly by search terminations. Conclusion: indirect test is weak (Table 1) (a critique of previous papers). Even naïve rule does well when theory is tested indirectly by search terminations. Conclusion: indirect test is weak (Table 1) (a critique of previous papers). Direct tests of reservation wage properties Entire path of reservation wages was tested against the predicted path of reservation wages (equation (3)) Entire path of reservation wages was tested against the predicted path of reservation wages (equation (3)) Concave (risk averse) model is the winner. Concave (risk averse) model is the winner. That is, one cannot reject hyp that coef. from (2) are equal to those implies by the optimal reservation wage path for risk- averse agent (I’m not clear on U(x) function assumed).

Final Thoughts Experimental Institution is specifically designed not like the real world in order to test this particular theory. Highlights the importance of the theoretical parameters as opposed to natural institutions to create a convincing and fair test of a theory. Highlights the importance of the theoretical parameters as opposed to natural institutions to create a convincing and fair test of a theory. Direct test results are consistent with the “Risk averse” model only. The test is, therefore, a joint test of risk aversion and the reservation wage hypothesis (if subjects are really risk neutral, then some off-setting effect could still occur to generate data consistent with the risk averse reservation wage path.) The test is, therefore, a joint test of risk aversion and the reservation wage hypothesis (if subjects are really risk neutral, then some off-setting effect could still occur to generate data consistent with the risk averse reservation wage path.) Results consistent with more recent results (e.g., Holt and Laury, 2002) indicating that lab subjects are, on average, risk-averse for in lottery choice environments Results consistent with more recent results (e.g., Holt and Laury, 2002) indicating that lab subjects are, on average, risk-averse for in lottery choice environments