Ludvig Andersson

Title: The Effect of Coarse Reasoning on a Search and Matching Market with Transferable Utility

Abstract: This paper studies a frictional search and matching market with transferable utility while relaxing the assumption of rational expectations. This is done by introducing bounded rationality in the form of analogy-based expectations equilibrium. I find that boundedly rational agents underestimate their prospects on the market. Consequently, they become impatient and willing to accept a larger set of matches. The resulting equilibrium outcome is less efficient than that with rational expectations. Providing agents with more feedback about the choices of rejected agents further amplifies the undesired effects of bounded rationality. Since the effect of analogy-based expectations on equilibrium strategies is similar to the effect of search frictions, reducing the latter may dampen the effect of the former.