Research

We measure individual bias in labor market expectations in German survey data and find that workers on average significantly overestimate their individual probabilities to separate from their job when employed as well to find a job when unemployed. These biases vary significantly between population groups. Most notably, East Germans are significantly more pessimistic than West Germans. We find a significantly negative elationship between the pessimistic bias in job separation expectations and wages, and a significantly positive relationship between optimistic bias in job finding expectations and reservation incomes. We interpret and quantify the effects of (such) expectation biases on the labor market equilibrium in a search and matching model of the labor market. Removing the biases could substantially increase wages and expected lifetime income in East Germany. The bias difference in labor market expectations explains part of the East-West German wage gap.

Idiosyncratic labor market risk is a prevalent phenomenon with important implications for individual choices. In labor market research it is commonly assumed that agents have rational expectations and therefore correctly assess the risk they face in the labor market. We analyze survey data for the U.S. and document a substantial optimistic bias of households in their subjective expectations about future labor market transitions. Furthermore, we investigate the heterogeneity in the bias across different demographic groups and we find that low-skilled individuals tend to be strongly over-optimistic about their labor market prospects, whereas high-skilled individuals have rather precise beliefs. In the context of a quantitative heterogeneous agents life cycle model we show that the optimistic bias has a sizable negative effect on the life cycle allocation of income, consumption and wealth and implies a substantial loss in individual welfare compared to the allocation under full information. Moreover, we establish that the heterogeneity in the bias leads to pronounced differences in the accumulation of assets across individuals, and is thereby a quantitatively important driver of inequality in wealth.

We develop an equilibrium search model with a labor force participation decision, job-to-job transitions, and endogenous separations. The calibrated model perfectly matches the observed labor market flows in US data. We use the model to simulate the effects of an extension of unemployment insurance benefits to 99 weeks. The reform leads to a decrease in employment, an increase in the labor force participation and unemployment rate, while it leaves labor productivity roughly constant. Using a model-based decomposition, as well as comparisons with alternative simplified models, we show that modeling workers’ participation decisions, job-to-job transitions, and endogenous separations together is crucial for a complete and accurate analysis of UI reforms.

We study how marital property laws shape household saving and investment decisions, exploiting regional variation in statutory defaults across Spain. Using this variation as an instrument, we find that Separate Property reduces household saving but has no significant average effect on stock market participation. This null effect, however, masks sharply opposing responses: Separate Property increases participation by 8.9 percentage points when the wife is the financial head (the spouse most knowledgeable about household finances) and decreases it by 10.7 percentage points when the husband is, independently of spouses' relative earnings. To explain these findings, we develop a dynamic collective life-cycle model with limited commitment, endogenous divorce, and portfolio choice. The model highlights two distinct channels: financial management shapes how property regimes affect stock market participation costs, while spouses' ownership claims upon divorce influence saving and marital stability through endogenous asset titling. In a counterfactual that extends Separate Property to the rest of Spain, the model predicts lower divorce rates and a redistribution of welfare from husbands to wives. Our findings show that marital property laws shape household financial behavior not only through ownership rights, but also through the organization of financial decision-making within marriage.

We study firms’ financial and real decisions after an exogenous change in their interest rate beliefs induced by a survey experiment with an information treatment. Firms revise their expectations downward after learning about the European Central Bank’s policy rate. Moreover, we find a reduction in interest rate uncertainty. We link the survey to credit register data and find that treated firms both increase their loan amounts and shift their loan structure toward longer-term, fixed-rate credit with lower interest rates. Using balance sheet data, we also show that treated f irms invest more following the RCT. These effects are driven by small firms. We rationalize our findings in a stylized model of firms with imperfect information about the interest rate.

Why have average labor productivity and real wages not converged between East and West Germany after reunification? Documenting a diverging relative supply of high-skilled workers, I propose a new explanation for this puzzle: In the presence of fewer high-skilled workers, East German firms operate under a different organization of production, stay smaller, are less productive, and pay lower wages. Exploiting rich, administrative datasets, I document a positive relation between the size and the share of high-skilled workers in an establishment, as well as positive semi-elasticities regarding wages for both worker types and regions controlling for observables. Using a general equilibrium model with large firms operating in a frictional labor market, implies that over 26% of the wage gap after controlling for on worker and job characteristics between East and West Germany in 2015 can be explained by the lower relative supply of high skilled workers. The model also predicts that output would increase by 20% if East Germany had the same relative supply of workers as West Germany. 

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 analytically 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.