Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/271985 
Year of Publication: 
2023
Series/Report no.: 
CESifo Working Paper No. 10341
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
Recent research documents mounting evidence for sizable and persistent biases in individual labor market expectations. This paper incorporates subjective expectations into a general equilibrium labor market model and studies the implications of biased expectations for wage bargaining, vacancy creation, worker flows and labor market policies. Importantly, we find that under the widely used period-by-period Nash bargaining protocol, the model generates a counterfactual relationship between workers' job separation expectations and wages. Instead, a wage setting process with less frequent wage renegotiations is found to be empirically consistent. Moreover, we show that the presence of biased beliefs can qualitatively alter the equilibrium effects of labor market policies. Lastly, when allowing for biased firms' beliefs, we establish that only the difference between firms' and workers' biases matters for the bargained wage but not the size of biases.
Subjects: 
subjective expectations
labor markets
search and matching
bargaining
policy
JEL: 
E24
J64
D84
Document Type: 
Working Paper
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