The effect of coarse reasoning on a search and matching market with transferable utility

This paper studies a frictional search and matching market with transferable utility while relaxing the assumption of rational expectations. This is done by introducing bounded rationality in the form of analogy-based expectations equilibrium. I find that boundedly rational agents underestimate their prospects on the market. Consequently, they become impatient and willing to accept a larger set of matches. The resulting equilibrium outcome is characterized by greater mismatch than that with rational expectations. The effect of analogy-based expectations on equilibrium strategies is similar to the effect of search frictions. Hence, reducing the search frictions may dampen the negative effect induced by bounded rationality.