Identifying bounded rationality with panel data: evidence from the labor markets of Italy and Germany

Abstract

In this paper we question the hypothesis of bounded rationality against full rationality in the context of job changing behavior, via simple econometric explorations on microdata drawn from Worker Histories Italian Panel (WHIP) and Sample of Integrated Labor Market Biographies (SIAB). The identification strategy builds on a quasi-counterfactual experiment in which the performance of each voluntary mover is compared to the average performance of a peer-group of stayers of the same skill group, co-workers in the firm from which the movers’ job switch originated. Voluntary movers are identifiable in the WHIP and SIAB datasets, while it is not possible to do the same among the stayers. Full rationality suggests that the performance of voluntary movers should be superior to the stayers’ (both voluntary and involuntary) as the involuntary stayers have a smaller decision set from which to choose. In this exploration we find a clear opposite result, which we take as evidence of bounded rationality of the movers.

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Notes

  1. 1.

    “Major” reductions are assumed to be those in excess of 40% of the 1986 workforce.

  2. 2.

    Some workers may have moved more than once in the observation period: the k-th employer is his last destination.

  3. 3.

    Another plausible definition of y* could be in terms of individual earnings growth—say 10%—over each person’s past salary W, in alternative to the cell W-median.

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Acknowledgements

Bruno Contini is grateful to C. Flinn for a casual observation at lunch table that led me to readdress from scratch the identification strategy of this study. I also thank an unknown referee for useful comments.

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Correspondence to Bruno Contini.

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Contini, B., Pusch, T. Identifying bounded rationality with panel data: evidence from the labor markets of Italy and Germany. Mind Soc 17, 71–84 (2018). https://doi.org/10.1007/s11299-019-00204-5

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Keywords

  • Behavioral economics
  • Decision making
  • Counterfactual identification