Comment

Abstract

At a general level, this paper is an exploration of the effect of departures from rational expectations in frictional models of the labor market. More specifically, it studies a handful of examples in which some (or all) workers are assumed to exhibit a very specific form of irrational expectations that Menzio labels as stubborn beliefs. As one would expect with this author, the modeling features a high level of artistry and craftsmanship, the analysis is clear and elegant, and all of the results are accompanied with strong intuition. The examples illustrate that these departures from rational expectations can have interesting effects on aggregate labor-market outcomes, and some of the results are quite provocative. In particular, he shows in one of his examples that a small subset of workerswith stubborn beliefs canmake labormarket outcomes more volatile for all workers in the labor market. That is, workers with incorrect perceptions are not just hurting themselves, they are hurting all workers. The paper also offers amethodological contribution in showing how to formulate equilibrium in frictional models with strategic wage setting and irrational beliefs. There are two key components to the exercises carried out in the paper. One component is the specification of the departure from rational expectations. The second component is the mechanism through which the specific departure from rational expectations is propagated into aggregate labor-market outcomes. Inwhat follows, I will discuss each of these in turn.