Testing Bounded Rationality Against Full Rationality in Job Changing Behavior

No 81, LABORatorio R. Revelli Working Papers Series from LABORatorio R. Revelli, Centre for Employment Studies

Abstract: In this paper I question the hypothesis of full rationality in the context of job changing behaviour, via simple econometric explorations on microdata drawn from WHIP (Worker Histories Italian Panel). Workers’ performance is compared at the end of a three-year time window that starts when choices are expressed, under the accepted notion that the main driving forces of job change are future real wages and expected job quality. Bounded rationality suggests that individuals will search for new options capable to attain “satisfactory” targets (aspirations levels, standards, reference points, norms), based on conditions prevailing in their own local environments. The empirical strategy consists of appropriately defining such environments (cells) and observing the ex-post individual performance vis-à-vis their targets, in terms of degree of dispersion, clustering and mobility within and between cells. Under full rationality the following are to be expected: - large dispersion around the targets; - clustering in the vicinity of the theoretical efficiency frontier; - high inter-cell mobility; None of the above expectations are confirmed in this exploration. My conclusion is that workers appear to behave according to principles of rationality different from those of “full rationality” assumed in the vast majority of contemporary empirical (and theoretical) studies. The idea of “bounded rationality” à la Simon seems to provide a better fit to our observations.

Date: 2008
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Working Paper: Testing Bounded Rationality against Full Rationality in Job Changing Behavior (2007)
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