Addiction theory

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Addiction theory is a term used in economics . It examines supply and demand behavior in markets where trading partners cannot be found instantaneously, i.e. they have to look for a suitable trading partner first.

Theory was and is influential in many areas of economics. In labor economics , it is used to analyze frictional unemployment , i.e. unemployment that arises from job search. In consumer theory , it was used to analyze purchasing decisions. From an employee's point of view, a job should be well paid, offer attractive conditions, such as social security, and a pleasant and safe working environment. From the consumer's point of view, a product must be of sufficient quality and be offered sufficiently cheaply to classify it as potentially purchasable . In both cases, the acceptance of the product or the job depends on what alternatives the searcher believes they have on the market.

More specifically, addiction theory examines an individual's optimal strategy for choosing from a number of uncertain choices, on the assumption that delaying the decision involves costs. Search models show how the individual weighs costs by delaying the decision against the benefit, to try another option or to evaluate exante. Mathematically speaking, these are optimal stopping problems. Macroeconomists have applied search theory to general equilibrium models in which one or more seekers interact. This theory is called the matching theory .

Search given a distribution

George J. Stigler began research on the behavior of employees looking for jobs as an economic problem. John J. McCall proposed a dynamic job search model based on the mathematical method of optimal stopping. Much of the later work in this area was based on this. He examined which job offers a job-seeking individual should accept if he is aware of the alternatives that are potentially available to him and these do not change (i.e. the distribution of the alternatives is known and constant) and the value of the money remains the same. In his research, he describes the wage as the reservation wage , in addition to which the individual is just about to accept a job. The individual's optimal strategy is now to turn down any job that offers a lower wage than the reservation wage and to accept any job that offers a higher wage. An individual's reservation wage can change. If, for example, the individual's qualifications deteriorate due to a long period of unemployment, the job alternatives will also deteriorate (the distribution will therefore change). This relationship is particularly interesting when viewed over time: the longer the individual rejects job offers (in the hope of getting a better one), the more his reservation wages decrease. Likewise, the reservation wage could fall because the individual fears that he will run out of money before he can satisfactorily complete the search. An interesting observation in McCall's model is that the greater the variance in wages on offer, the longer the optimal search process will take, even if the individual is risk averse . If you keep the arithmetic mean of wages constant, but increase their variance , the individual will want to search longer. It sets a higher reservation wage in the hope of getting an extraordinarily good wage. The fact that the individual comes across extremely bad offers while searching is of little concern, since bad offers can be rejected.

McCall's application of addiction theory focused on the search behavior of unemployed individuals. But its results can also be used in consumer theory. In this context, the highest price that an individual is just willing to pay is called the reservation price .

Search for unknown distribution

If the individual does not know the distribution of wage offers, there is an additional incentive to search: the longer he searches, the more he can learn about the distribution of offers. Searching in unknown distributions is also known as the multi-armed bandit problem . The name comes from the expression one-armed bandit , which stands for a slot machine in casinos, where you can only say something about the distribution of payouts by trying it out, i.e. playing. Optimal search strategies for unknown distributions were analyzed using allocation indices such as the Gitting index.

Endogenization of price distribution

When examining search problems, economists came across the question of why the same good should be sold at different prices in an equilibrium market, which contradicts classical microeconomics . However, if individuals have imperfect information about where they can find the good at the lowest price (i.e. whenever a search is necessary), providers will choose different prices and theoretically be indifferent between them: some will raise the prices and only the individuals with higher prices Trade reservation prices. Others will choose lower prices in order to sell more as they will undercut the reservation price of the individuals more often.

Matching theory

In recent research, addiction theory has been embedded in macroeconomic models, more precisely, in a framework called matching theory . Peter A. Diamond , Dale Mortensen and Christopher A. Pissarides received the Nobel Prize in Economics in 2010 for their research on matching theory .

If you apply matching theory to labor markets, there are two searchers: On the one hand, the individuals who are looking for employers, and on the other hand, companies that are looking for employees. The rate at which new jobs are created now depends on the interaction of both groups. Some models incorporate a wage distribution, others simplify it by implying that individuals have been unemployed for an indefinite and random period of time before starting work again. A distribution of wages is brought about via the reservation wage mechanism.

Individual evidence

  1. ↑ Stigler, George J. (1961): The economics of information. Journal of Political Economy 69 (3): 213-225. JSTOR 1829263
  2. ↑ Mortensen, D. (1986). Job search and labor market analysis . In Ashenfelter, O .; Card, D. The Handbook of Labor Economics . 2. Amsterdam: North Holland. ISBN 0-444-87857-2
  3. ^ McCall, John J. (1970). Economics of information and job search . Quarterly Journal of Economics 84 (1): 113-126. doi : 10.2307 / 1879403 .
  4. ↑ Danforth, John P. (1979). On the role of consumption and decreasing absolute risk aversion in the theory of job search . In Lippman, SA; McCall, JJ Studies in the Economics of Search. New York: North Holland. ISBN 0-444-85222-0 .
  5. ^ Butters, GR (1977). Equilibrium distributions of sales and advertising prices . Review of Economic Studies 44: 465-491. doi : 10.2307 / 2296902 .
  6. ↑ Burdett, Kenneth; Judd, Kenneth (1983). Equilibrium price dispersion . Econometrica 51 (4): 955-969. JSTOR 1912045
  7. ↑ http://static.nobelprize.org/nobel_prizes/economics/laureates/2010/press.pdf
  8. ↑ Mortensen, Dale; Pissarides, Christopher (1994). Job creation and job destruction in the theory of unemployment . Review of Economic Studies 61 (3): 397-415. doi : 10.2307 / 2297896 .
  9. ↑ Pissarides, Christopher (2000). Equilibrium Unemployment Theory (2nd ed.). MIT Press. ISBN 0-262-16187-7 .