Real-Time Search in the Laboratory and the Market

• Published in: The American economic review Vol. 101; no. 2; pp. 948 - 974
• Main Authors: Brown, Meta, Flinn, Christopher J., Schotter, Andrew
• Format: Journal Article
• Language: English
• Published: Nashville American Economic Association 01.04.2011; American Economic Assoc
• Subjects: Central banks; Confidence interval; Cost estimates; Costs; Discounting; Econometrics; Economic models; Economics; Employment; Experimental economics; Experiments; Job hunting; Job search; Labor economics; Labor market; Laboratories; Labour market; Market theory; Reservation wage; Search theory; Shorter Papers; Standard error; Studies; Time dependence; Unemployed; Unemployment; Wages; Wages & salaries
• ISSN: 0002-8282; 1944-7981
• DOI: 10.1257/aer.101.2.948

While widely accepted labor market search models imply a constant reservation wage policy, empirical evidence strongly suggests that reservation wages decline in search duration. This paper reports the results of the first real-time-search laboratory experiment. The controlled environment subjects face is stationary, and the payoff-maximizing reservation wage is constant. Nevertheless, subjects' reservation wages decline sharply over time. We investigate two hypotheses to explain this decline: 1. Searchers respond to the stock of accruing search costs. 2. Searchers experience non-stationary subjective costs of time spent searching. Our data support the latter hypothesis, and we substantiate this conclusion both experimentally and econometrically. (JEL C91, D83, J64)