Ambiguity and Unemployment Fluctuations
39 Pages Posted: 16 Mar 2022
Date Written: March 2, 2022
We analyze the consequences of ambiguity aversion in the Diamond-Mortensen-Pissarides (DMP) search and matching model. Our model features a cross-section of workers whose productivity is the sum of an aggregate and a match-specific component. Firms are ambiguity averse towards match-specific productivity. Our model delivers two insights. First, we show that ambiguity aversion substantially amplifies unemployment rate volatility. Second, we show that a part of the high value of leisure required by the canonical DMP model to generate realistic unemployment rate volatility can arise from fitting a model missing ambiguity aversion to data generated in an environment where agents are ambiguity averse.
Keywords: Ambiguity, model uncertainty, robustness, unemployment, labor search.
JEL Classification: D81, E24, E32, J63, J64
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