Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/335968 
Authors: 
Year of Publication: 
2025
Series/Report no.: 
IZA Discussion Papers No. 18320
Publisher: 
Institute of Labor Economics (IZA), Bonn
Abstract: 
This paper connects classical preference theory to quantitative job search and savings models. We treat job acceptance as a choice between stochastic income lotteries. By integrating Decreasing Absolute Risk Aversion (DARA) and Prudence (DAP), we derive five contributions. First, we prove the standard positive wealth effect on reservation wages is driven by the gap between the risk premium (equating total utilities) and the prudence premium (equating marginal utilities), while resolving value function concavity. Second, a unified theorem shows the wealth effect depends on the stochastic dominance of on-the-job search (OJS) versus unemployed search. We uncover a novel "Investment Fund" regime: when OJS is superior, reservation wages decrease with wealth as agents purchase access to high-growth states. Third, this explains consumption puzzles, showing the high MPC of the unemployed is an endogenous response to background risk. Fourth, we demonstrate an isomorphism between labor and savings: the reservation wage exhibits the same prudence-driven diminishing sensitivity as the consumption function. Fifth, borrowing constraints amplify wealth sensitivity without altering qualitative risk rankings.
Subjects: 
job search
wealth
consumption
risk-aversion
prudence
JEL: 
E21
H55
J64
Document Type: 
Working Paper

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