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Optimal Unemployment Insurance: Transitional Dynamics vs. Steady State

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Author Info

  • Gilles Joseph

    (Universite Catholique de Louvain)

  • Thomas Weitzenblum

    (Universite Paris-Dauphine and CEPREMAP)

Abstract

In this study, we ask whether the presence of precautionary savings substantially reduces the optimal replacement rate in an European economy type characterized by high unemployment benefits and moral hazard. We build a simple job search model calibrated on French data and, in line with previous studies, find that the optimality criterion based on comparisons of steady states leads to a low optimal ratio. Yet, this result ignores potential transitional costs due to the necessity for agents to increase their savings and reduce their consumption whenever the ratio is cut. We therefore build a dynamic model taking full account of the transition, and show that a reduction in benefits reduces welfare. Even though the long-run optimal replacement rate is lower than the current one, transitional costs dominate long-run gains. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/S1094-2025(03)00021-8
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 6 (2003)
Issue (Month): 4 (October)
Pages: 869-884

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Handle: RePEc:red:issued:v:6:y:2003:i:4:p:869-884

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Related research

Keywords: equilibrium unemployment; job search; moral hazard; precautionary savings; unemployment insurance.;

References

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  1. Shavell, Steven & Weiss, Laurence, 1979. "The Optimal Payment of Unemployment Insurance Benefits over Time," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1347-62, December.
  2. Wang, Cheng & Williamson, Stephen D., 2002. "Moral Hazard, Optimal Unemployment Insurance and Experience Rating," Staff General Research Papers 10133, Iowa State University, Department of Economics.
  3. Hansen, G.D. & Imrohoroglu, A., 1990. "The Role Of Unemployment Insurance In An Economy With Liquidity Constraints And Moral Hazard," Papers 21, California Los Angeles - Applied Econometrics.
  4. van den Berg, Gerard J, 1990. "Nonstationarity in Job Search Theory," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 255-77, April.
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  6. Acemoglu, Daron & Shimer, Robert, 2000. "Productivity gains from unemployment insurance," European Economic Review, Elsevier, vol. 44(7), pages 1195-1224, June.
  7. Gruber, Jonathan, 1997. "The Consumption Smoothing Benefits of Unemployment Insurance," American Economic Review, American Economic Association, vol. 87(1), pages 192-205, March.
  8. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
  9. Mark Huggett, 2004. "Precautionary Wealth Accumulation," Review of Economic Studies, Oxford University Press, vol. 71(3), pages 769-781.
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  17. Fredriksson, Peter & Holmlund, Bertil, 2001. "Optimal Unemployment Insurance in Search Equilibrium," Journal of Labor Economics, University of Chicago Press, vol. 19(2), pages 370-99, April.
  18. Mark Huggett, 1995. "The one-sector growth model with idiosyncratic shocks," Discussion Paper / Institute for Empirical Macroeconomics 105, Federal Reserve Bank of Minneapolis.
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  20. Atkinson, Anthony B & Micklewright, John, 1991. "Unemployment Compensation and Labor Market Transitions: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 29(4), pages 1679-1727, December.
  21. Luc Arrondel, 1996. "Patrimoine des ménages : toujours le logement, mais aussi les actifs de précaution," Économie et Statistique, Programme National Persée, vol. 296(1), pages 33-62.
  22. Aiyagari, S Rao, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 659-84, August.
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  25. Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 953-969.
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Citations

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Cited by:
  1. Toshihiko Mukoyama, 2010. "Understanding the Welfare Effects of Unemployment Insurance Policy in General Equilibrium," 2010 Meeting Papers 286, Society for Economic Dynamics.
  2. Marcus Hagedorn & Ashok Kaul & Tim Mennel, 2007. "An Adverse Selection Model of Optimal Unemployment Insurance," IEW - Working Papers 315, Institute for Empirical Research in Economics - University of Zurich.
  3. Takashi Kamihigashi & John Stachurski, 2011. "Stability of Stationary Distributions in Monotone Economies," ANU Working Papers in Economics and Econometrics 2011-561, Australian National University, College of Business and Economics, School of Economics.
  4. Wolf-Heimo Grieben, 2005. "Schumpeterian growth and the political economy of employment protection," Journal of Economics, Springer, vol. 10(1), pages 77-118, December.
  5. Takashi Kamihigashi & John Stachurski, 2011. "Existence, Stability and Computation of Stationary Distributions: An Extension of the Hopenhayn-Prescott Theorem," Discussion Paper Series DP2011-32, Research Institute for Economics & Business Administration, Kobe University.
  6. Takashi Kamihigashi & John Stachurski, 2012. "Existence, Uniqueness and Stability of Stationary Distributions: An Extension of the Hopenhayn-Prescott Theorem," Discussion Paper Series DP2012-27, Research Institute for Economics & Business Administration, Kobe University.
  7. Stachurski, John & Kamihigashi, Takashi, 2014. "Stochastic stability in monotone economies," Theoretical Economics, Econometric Society, vol. 9(2), May.

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