Theoretical Framework — An Extended Search Model

  • Frank Reize
Part of the ZEW Economic Studies book series (ZEW, volume 25)


To model transitions from unemployment to self-employment theory provides in principle two guidelines. The first alternative is to model these transitions in the framework of dynamic occupational choice. However, the theoretical work provided by Lucas (1978) and Kihlstrom and Laffont (1979) only models the role of management capabilities, risk preferences and the initial capital endowment for the choice between self-employment and paid-employment, neglecting the state of unemployment. In principle, the state of unemployment could be incorporated in the models of occupational choice, but the focus of the analysis in this study is still the individual unemployment behaviour. The standard approach to model individual unemployment behaviour in empirical labour market economics is the use of hazard rate models (see Devine and Kiefer, 1991). The hazard of leaving unemployment can be interpreted as a reduced standard job-search model (see Steiner, 2001). Therefore, the second alternative, the job-search model, seems to be more appropriate to model transitions from unemployment to self-employment. However, the theory of occupational choice is not completely waived. As the standard search theory does not include the option of self-employment, the basic model is extended by some considerations derived by the theory of occupational choice.


Hazard Rate Wage Distribution Reservation Wage Occupational Choice Human Capital Theory 
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  1. 42.
    For comprehensive studies of unemployment duration in Germany, see e.g. Hunt (1995), Steiner (2001) or Wurzel (1993).Google Scholar
  2. 43.
    The models of Lucas (1978), Kihlstrom and Laffont (1979) and others concerning the choice between self-and paid-employment are discussed in more detail in Chapter 7, where the focus of the discussion is on the choice for self-employment and firm start-up, respectively.Google Scholar
  3. 44.
    For the derivation of the reservation wage see e.g. Franz (2003).Google Scholar
  4. 46.
    Though, the impact of individual factors like education may be included in the probability of receiving a job offer q, but the occurrence of minimum wages may still prevent q from rising to a level above zero.Google Scholar
  5. 47.
    See Pissaridis (1990) for an extensive discussion on matching models for the labour market. See also Hosios (1990) for the derivation of the equilibrium outcome of the matching process.Google Scholar
  6. 48.
    The IRR concept incorporates into the search model the ideas of the traditional labour supply models that occupational choice depends on the relative gain between two al-ternatives (see e.g. Burtless, 1989).Google Scholar
  7. 49.
    For a detailed discussion see Mortensen (1986).Google Scholar
  8. 51.
    For some detailed results of Pfeiffer and Reize (1999a) see also Section 2.2.2.Google Scholar
  9. 52.
    The probability of leaving self-employment is discussed in the context of firm survival. See Chapter 7 and Chapter 8.Google Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2004

Authors and Affiliations

  • Frank Reize
    • 1
  1. 1.KfW BankengruppeKSb Volkswirtschaftliche AbteilungFrankfurt am MainGermany

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