Optimal Consumption with Reference-dependent Preferences in on-the-job Search and Savings

Chi ZHOU*, Wansheng TANG*, Ruiqing ZHAO*

*Corresponding author for this work

Research output: Journal PublicationsJournal Article (refereed)peer-review

9 Citations (Scopus)


This paper studies a model of on-the-job search and savings under reference-dependent preferences that implies loss aversion in a worker’s con- sumption behaviors. The model analyzes how loss aversion affects the worker’s consumption decisions in job search. The results demonstrate that the presence of loss aversion will lead to a set of high steady-state consumption levels and the range of steady-state consumption levels is wider if the worker is more loss averse. Nevertheless, we show that there is a unique steady-state consumption level, which is a lower bound of the set, in the absence of loss aversion. In addition, we also find that great loss aversion may reduce consumption level, while small loss aversion not only causes consumption to remain at a high level, but also induces that the worker’s future consumption level goes down when the employment status changes.

Original languageEnglish
Pages (from-to)505-529
Number of pages25
JournalJournal of Industrial and Management Optimization
Issue number1
Publication statusPublished - Aug 2017
Externally publishedYes

Bibliographical note

This work is supported by the National Natural Science Foundation of China (No. 71071106), the National Natural Science Foundation of China (No. 71273186), the National Natural Science Foundation of China (No. 71371133), supported partially by Specialized Research Fund for the Doctoral Program of Higher Education of China (No. 20120032110071), and supported partially by Program for New Century Excellent Talents in Universities of China.


  • job search
  • loss aversion
  • optimal consumption
  • reference-dependent preferences
  • Stochastic dynamic programming
  • subdifferential

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