published in: Economic Journal, 2008, 118 (531), 1418–1452
This paper estimates the structural parameters of a job search model with hyperbolic
discounting and endogenous search effort. It estimates quantitatively the degree of
hyperbolic discounting, and assesses its implications for the impact of various policy
interventions aimed at reducing unemployment. The model is estimated using data on
unemployment spells and accepted wages from the National Longitudinal Survey of Youth
(NLSY). The likelihood function explicitly incorporates all the restrictions implied by the
optimal dynamic programming solution to the model. Both observed and unobserved
heterogeneity are accounted for. The results point to a substantial degree of hyperbolic
discounting, especially for low and medium wage workers. The structural estimates are also
used to evaluate alternative policy interventions for the unemployed. Estimates based on a
model with exponential discounting may lead to biased inference on the economic impact of
policies.
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