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An adverse selection model of optimal unemployment insurance

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  • Hagedorn, Marcus
  • Kaul, Ashok
  • Mennel, Tim

Abstract

We ask whether offering a menu of unemployment insurance contracts is welfare-improving in a heterogeneous population. We adopt a repeated moral hazard framework as in Shavell and Weiss (1979), supplemented by unobserved heterogeneity about agents' job opportunities. Our main theoretical contribution is a quasi-recursive formulation of our adverse selection problem, including a geometric characterization of the state space. Our main economic result is that optimal contracts for "bad" searchers tend to be upward-sloping due to an adverse selection effect. This is in contrast to the well-known optimal decreasing time profile of benefits in pure moral hazard environments that continue to be optimal for "good" searchers in our model.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 34 (2010)
Issue (Month): 3 (March)
Pages: 490-502

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Handle: RePEc:eee:dyncon:v:34:y:2010:i:3:p:490-502

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Web page: http://www.elsevier.com/locate/jedc

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Keywords: Unemployment insurance Recursive contracts Adverse selection Repeated moral hazard;

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References

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  1. Fredriksson, Peter & Holmlund, Bertil, 2003. "Improving Incentives in Unemployment Insurance: A Review of Recent Research," Working Paper Series 2003:10, Uppsala University, Department of Economics.
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Citations

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Cited by:
  1. Marcus Hagedorn & Ashok Kaul, 2004. "An Adverse Selection Model of Optimal Unemployment Insurance," Computing in Economics and Finance 2004 154, Society for Computational Economics.
  2. O'Flaherty, Brendan, 2009. "When should homeless families get subsidized apartments? A theoretical inquiry," Journal of Housing Economics, Elsevier, vol. 18(2), pages 69-80, June.
  3. Laun, Tobias, 2012. "Optimal Social Insurance with Endogenous Health," Working Paper Series in Economics and Finance 742, Stockholm School of Economics, revised 28 Apr 2012.
  4. Hairault, Jean-Olivier & Langot, François & Ménard, Sébastien & Sopraseuth, Thepthida, 2011. "Optimal Unemployment Insurance for Older Workers," CEPREMAP Working Papers (Docweb) 1107, CEPREMAP.
  5. Anne Bucher & Sébastien Ménard, 2010. "Employment Protection Legislation and Adverse Selection at the Labor Market Entry," TEPP Working Paper 2010-21, TEPP.
  6. Fuller, David L., 2014. "Adverse selection and moral hazard: Quantitative implications for unemployment insurance," Journal of Monetary Economics, Elsevier, vol. 62(C), pages 108-122.
  7. Arpad Abraham & Nicola Pavoni, 2008. "Efficient Allocations with Moral Hazard and Hidden Borrowing and Lending: A Recursive Formulation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 781-803, October.

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