Reference-Dependent Job Search: Evidence from Hungary

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IZA Seminar

Place: Schaumburg-Lippe-Str. 9, 53113 Bonn

Date: 15.09.2015, 12:15 - 13:30


Presentation by 

Stefano DellaVigna (University of California, Berkeley)


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 search effort. In anticipation of a benefit cut their search effort rises again, to then decline once they get used to the new 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 structurally estimate a model with optimal consumption-savings and endogenous search effort, as well as unobserved heterogeneity. The reference-dependent model fits the hazard rates substantially better than the standard model, holding constant the number of parameters. We estimate a significant weight on gain-loss utility and a speed of adjustment of the reference point in the order of six months. The estimates also point to substantial impatience, likely in the form of present-bias. Estimates of a variety of alternative models, including habit formation, do not come close to the fit of the reference-dependent model.

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