Wealth E®ects and Duration Dependence¤

In this paper we study a risk averse worker's optimal savings and job-search behavior as she moves back and forth between employment and unemployment. Recent empirical ¯ndings suggest a negative association between a risk averse worker's search e®ort and wealth. We show that additively separable utility and bounded wealth imply that job search is negatively a®ected by wealth, and characterize the worker's consumption paths and wealth formation under these conditions. In general, all decisions will depend on the current level of wealth. Furthermore, given optimal search, savings still provide imperfect insurance against income °uctuations; precautionary savings are built up during employment spells and run down during unemployment spells but the consumption path is never going to be completely smooth over states. Finally, our results suggests that wealth introduces an element of positive duration dependence to the probability of leaving unemployment