Search, Nash bargaining and rule-of-thumb consumers

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 na...

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Bibliographic Details
Published in:European economic review 2011-10, Vol.55 (7), p.927-942
Main Authors: Boscá, J.E., Doménech, R., Ferri, J.
Format: Article
Language:English
Subjects:
Bargaining
Consumption
Consumption theory
Game theory
General economic equilibrium
General equilibrium
Habits
Job search
Keynesian theory
Labor economics
Labor market
Labour market
Labour market search
Nash equilibrium
Rule-of-thumb consumers
Studies
Unemployment
Wage negotiations
Wages & salaries
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Summary: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.
ISSN:0014-2921
1873-572X
DOI:10.1016/j.euroecorev.2011.03.002