Attention Allocation between Job Search and Portfolio Investment

Description

This project will investigate a worker's attention allocation between job search and portfolio investment in a life-cycle search and matching model. On one hand, a working-age worker has new job offers arrive during the career, and the compensation of the new job may increase or decrease relative to the current job. Attention allocated to job search reduces the uncertainty in the new job match. On the other hand, the worker saves for future consumption because of labor income uncertainty and retirement. A risky asset pays a higher interest than the risk-free asset but carries a risk in the return. Attention allocated to portfolio investment reduces the uncertainty in the excess return of the risky asset. The worker has limited attention hence there is a tradeoff between job search and portfolio investment. If the worker pays more attention to the new job offer, he or she learns more about the quality of the new job atch and makes a better decision on whether to accept or reject new job offers hence increases the total wage income over the career. However, the attention paid to learn the excess return of the risky asset is reduced, which increases the risk in the worker's portfolioinvestment. Hence the expected investment return decreases, which reduces the future consumption and savings to retirement.The project will first set up the life-cycle attention allocation problem between job search and portfolio investment of a worker in a search and matching model. Then the worker's optimal decisions on attention, job search, and portfolio investment over the career and after retirement in equilibrium will be solved by backward induction. After that, comparative statics will be studied and the model results will be simulated using the parameters calibrated from the data of Panel Study of Income Dynamics. The effects of the worker's risk aversion, the attention limit, the mean and variance of the new job quality, the risk-free interest rate, the average return and risk on the risky assets, the initial wealth endowment, and how the income after retirement depends on the labor income during the career on the worker's life-cycle attention allocation, job turnovers, and portfolio risk will be explore. Suggestive policies on pension or retirement plans and saving subsidies will also be investigated to improve the worker's life-time welfare given the challenge of ageing population in Hong Kong.