Expectation Formation and Learning in the Labour Market with On-the-Job Search and Nash Bargaining

44 Pages Posted: 9 Jan 2019

See all articles by Anna Zaharieva

Anna Zaharieva

Bielefeld University - Department of Business Administration and Economics

Erdenebulgan Damdinsuren

Bielefeld University - Department of Business Administration and Economics

Date Written: December 21, 2018

Abstract

This paper develops a search and matching model with heterogeneous firms, on-the-job search by workers, Nash bargaining over wages and adaptive learning. We assume that workers are boundedly rational in the sense that they do not have perfect foresight about the outcome of wage bargaining. Instead workers use a recursive OLS learning mechanism and bases their forecats on the linear wage regression with the firm's productivity and worker's current wage as regeressors. For a retricted set of parameters we show analytically that the Nash bargaining solution in this setting is unique. We embed this soultion into the agent-based simulation and provide a numerical characterization of the Restricted Perceptions Equilibrium. The simulation allows us to collect data on productivities and wages which is used for updating workers' expetations. The stimated regression coefficient on productivity is always higher than the bargaining power of workers, but the difference between the two is decreasing as the bargaining power becomes larger and vanishes when workers are paid their full productivity. In the equilibrium a higher bargaining power is associated with higher wages and larger wage dispersion, in addition, the earning distribution becomes more skewed. Moreover, our results indicate that a higher barganing power is associated with a lower overall frequency of job-to-job transitions and a lower fraction of inefficient transitions among them. Our results are robust ot the shifts of the productivity distribution.

Keywords: On-the-job search, Nash bargaining, OLS learning, inefficient transitions

JEL Classification: C63, D83, J31, J63, J64

Suggested Citation

Zaharieva, Anna and Damdinsuren, Erdenebulgan, Expectation Formation and Learning in the Labour Market with On-the-Job Search and Nash Bargaining (December 21, 2018). Bielefeld Working Papers in Economics and Management No. 10-2018, Available at SSRN: https://ssrn.com/abstract=3312676 or http://dx.doi.org/10.2139/ssrn.3312676

Anna Zaharieva (Contact Author)

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
D-33501 Bielefeld, NRW 33501
Germany

Erdenebulgan Damdinsuren

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
D-33501 Bielefeld, NRW 33501
Germany

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