Search, Nash bargaining and rule-of-thumb consumers

José Boscá, Rafael Domenech and Javier Ferri

European Economic Review, 2011, vol. 55, issue 7, 927-942

Abstract: This paper analyses the effects of introducing two typical Keynesian features, namely rule-of-thumb (RoT) consumers and consumption habits, into a standard labour market search model. RoT consumers use the margin that hours and wage negotiation provides them to improve their lifetime utility, by narrowing the gap in utility with respect to Ricardian consumers. This margin for intertemporal optimisation has not been studied yet, because this class of restricted agents has been mainly used in models with no equilibrium unemployment. Our approach allows for a deeper study of the effects of shocks on vacancies, unemployment, hours, wages and how they interact. As habits increase, RoT consumers find it optimal, after a positive technology shock, to negotiate lower hours and higher wages, and this mechanism reduces the simulated correlation between the real wage (or productivity) and total hours to values closer to those obtained empirically. Thus, with the interaction of RoT consumers and consumption habits, the labour market search model improves significantly in reproducing some of the stylised facts characterising the US labour market.

Keywords: General equilibrium; Labour market search; Habits; Rule-of-thumb consumers (search for similar items in EconPapers)
JEL-codes: E24 E32 E62 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

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Related works:
Working Paper: Search, Nash Bargaining and Rule of Thumb Consumers (2009)
Working Paper: Search, Nash Bargaining and Rule of Thumb Consumers (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:55:y:2011:i:7:p:927-942

DOI: 10.1016/j.euroecorev.2011.03.002

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