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The Credibility Problem in Unemployment Insurance Policy

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  • Robert A. J. Dur

Abstract

This paper studies the interaction between trade unions, which set wages, and a policymaker, who decides on the level of unemployment benefits and taxes. If the policymaker cannot commit to future policies, taxes and benefits are excessively high in equilibrium. Moreover, employment and output are inefficiently low. Appointing a policymaker who is more conservative than the median voter may solve the credibility problem. Alternatively, increasing wage flexibility may make the credibility problem less severe. Finally, I argue that, when evaluated behind a veil of ignorance, the credibility problem may be a blessing rather than a curse.

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Bibliographic Info

Article provided by Mohr Siebeck, Tübingen in its journal Journal of Institutional and Theoretical Economics.

Volume (Year): 157 (2001)
Issue (Month): 4 (December)
Pages: 634-

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Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200112)157:4_634:tcpiui_2.0.tx_2-k

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  1. Richard Layard & Stephen Nickell, 1998. "Labour Market Institutions and Economic Performance," CEP Discussion Papers dp0407, Centre for Economic Performance, LSE.
  2. Robert J. Barro & David B. Gordon, 1983. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
  3. Torsten Persson & Guido Tabellini, 1997. "Political Economics and Macroeconomic Policy," NBER Working Papers 6329, National Bureau of Economic Research, Inc.
  4. Burda, Michael C., 1997. "Corporatism, labor unions and the safety net," European Economic Review, Elsevier, vol. 41(3-5), pages 635-646, April.
  5. Hassler, John & Rodríguez Mora, José V., 1997. "Employment Turnover and Unemployment Insurance," Seminar Papers 623, Stockholm University, Institute for International Economic Studies.
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