Job Search, Matching Information, and the Behavior of Reservation Wages Over an Unemployment Spell

Abstract

This paper develops a model of job search where some information of value is revealed only after a job starts and where job prospects need not be identical. Using results from the theory of multi—armed bandits, it is shown that the optimal sampling strategy consists of an ordering of the job prospects to be searched. Those jobs with greater 'residual' uncertainty remaining when the job begins, will, ceteris paribus, be placed higher in the sampling order and be associated with a lower reservation wage. Thus, if jobs differed only with respect to this match uncertainty, reservation wages would increase over an unemployment spell. In general, when search costs and wage distributions also differ across jobs, the behavior of reservation wages over an unemployment spell need not be monotonic.