TEL  Vol.5 No.1 , February 2015
The Unemployment Volatility Puzzle: A Note on the Role of Reference Points
Author(s) Vincent Boitier
ABSTRACT
This theoretical note aims at studying the role of reference points in generating unemployment volatility. For this purpose, I introduce the notion of reference points in a standard Mortensen-Pissarides model. I obtain two results. First, I find that the obtained model is similar to the one found by Pissarides in 2009. Second, I show that the introduction of reference points can increase significantly unemployment volatility through a mechanism à la Hagerdorn and Manovskii.

Cite this paper
Boitier, V. (2015) The Unemployment Volatility Puzzle: A Note on the Role of Reference Points. Theoretical Economics Letters, 5, 92-96. doi: 10.4236/tel.2015.51013.
References
[1]   Kahneman, D. (1992) Reference Points, Anchors, Norms, and Mixed Feelings. Organizational Behavior and Human Decision Processes, 51, 296-312. http://dx.doi.org/10.1016/0749-5978(92)90015-Y

[2]   Kahneman, D. and Tversky, A. (1979) Prospect Theory: An Analysis of Decision under Risk. Econometrica, 47, 263-291. http://dx.doi.org/10.2307/1914185

[3]   Koszegi, B. and Rabin, M. (2006) A Model of Reference-Dependent Preferences. Quarterly Journal of Economics, 121, 1133-1166.

[4]   Hagerdorn, M. and Manovskii, I. (2008) The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited. American Economic Review, 98, 1692-1706. http://dx.doi.org/10.1257/aer.98.4.1692

[5]   Pissarides, C. (2009) The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer? Econometrica, 77, 1339-1369. http://dx.doi.org/10.3982/ECTA7562

[6]   Eliaz, K. and Spiegler, R. (2013) Reference-Dependence and Labor-Market Fluctuations. NBER Working Paper No. 19085.

[7]   Pissarides, C. (2000) Equilibrium Unemployment Theory. MIT Press, Cambridge.

[8]   Compte, O. and Jehiel, P. (2003) Bargaining with Reference Dependent Preferences, Mimeo.

 
 
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