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Optimal Unemployment Insurance with Endogenous Search Effort

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  • Ping Yan

    (National School of Development, China Center for Economic Research, Peking University)

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    Abstract

    In the framework of a search and matching model, when search effort enters the labor market matching function, search effort by one worker generates a negative externality on other workers searching for jobs. The solution to the social planner's problem may not be decentralized in a competitive market. Calibration shows that the current US unemployment insurance (UI) system generates an 8.07% welfare loss relative to the socially optimal allocation. An alternative scheme with higher replacement rate and lower wage, which achieves the highest welfare level among all competitive equilibria with unemployment insurance, leads to a welfare loss of only 1.18%.

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    File URL: http://www.aeconf.net/Articles/Nov2011/aef120206.pdf
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    Bibliographic Info

    Article provided by Society for AEF in its journal Annals of Economics and Finance.

    Volume (Year): 12 (2011)
    Issue (Month): 2 (November)
    Pages: 347-369

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    Handle: RePEc:cuf:journl:y:2011:v:12:i:2:p:347-369

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    Related research

    Keywords: Matching function; Search effort; Unemployment insurance;

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    References

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    1. Daron Acemoglu & Robert Shimer, 1999. "Productivity Gains from Unemployment Insurance," NBER Working Papers 7352, National Bureau of Economic Research, Inc.
    2. Haoming Liu & Yi Wen & Lijing Zhu, 2005. "Uniform working hours and structural unemployment," Working Papers 2005-045, Federal Reserve Bank of St. Louis.
    3. Yashiv, E., 1999. "The Determinants of Equilibrium Unemployment," Papers 36-99, Tel Aviv.
    4. Barbara Petrongolo & Christopher A. Pissarides, 2000. "Looking Into the Black Box: A Survey of the Matching Function," CEP Discussion Papers dp0470, Centre for Economic Performance, LSE.
    5. Pieter A. Gautier, 2001. "The Right Man for the Job," CESifo Working Paper Series 540, CESifo Group Munich.
    6. Chun Chang & Yijiang Wang, 2000. "Choosing between Up-or-Out and Spot Contracts: Human Capital Investment versus Job-Matching Considerations," Annals of Economics and Finance, Society for AEF, vol. 1(1), pages 189-210, May.
    7. Richard E. Kihlstrom & Jean-Jacques Laffont, 2002. "General Equilibrium in a Labor-Managed Economy with Uncertainty and Incomplete Markets," Annals of Economics and Finance, Society for AEF, vol. 3(1), pages 185-217, May.
    8. Hopenhayn, Hugo A & Nicolini, Juan Pablo, 1997. "Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 412-38, April.
    9. Oliver Jean Blanchard & Peter Diamond, 1989. "The Beveridge Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1), pages 1-76.
    10. Edi Karni, 1999. "Optimal Unemployment Insurance: A Survey," Southern Economic Journal, Southern Economic Association, vol. 66(2), pages 442-465, October.
    11. repec:aea:jeclit:v:43:y:2005:i:4:p:959-988 is not listed on IDEAS
    12. W. Henry Chiu & Edi Karni, 1998. "Endogenous Adverse Selection and Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 106(4), pages 806-827, August.
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