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Figuring out the Impact of Hidden Savings on Optimal Unemployment Insurance

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  • Narayana Kocherlakota

    (Stanford University)

Abstract

In this paper, I consider the problem of optimal unemployment insurance in a world in which the unemployed agent's job-finding effort is unobservable and his level of savings is unobservable. I show that the first-order approach is not always valid for this problem, and I argue that the available recursive procedures are not currently computationally feasible. Nonetheless, for the case in which the disutility of effort is linear, I am able to provide a complete characterization of the optimal contract: the agent's consumption is constant while he is unemployed, and jumps up to a higher constant and history-independent level of consumption when he finds a job. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2004.01.003
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 7 (2004)
Issue (Month): 3 (July)
Pages: 541-554

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Handle: RePEc:red:issued:v:7:y:2004:i:3:p:541-554

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  1. Abraham, Arpad & Pavoni, Nicola, 2004. "Efficient Allocations with Moral Hazard and Hidden Borrowing and Lending," Working Papers, Duke University, Department of Economics 04-05, Duke University, Department of Economics.
  2. Doepke, Matthias & Townsend, Robert M, 2004. "Dynamic Mechanism Design with Hidden Income and Hidden Auctions," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4455, C.E.P.R. Discussion Papers.
  3. Atila Abdulkadiroglu & Burhanettin Kuruscu & Aysegul Sahin, 2002. "Unemployment Insurance and the Role of Self-Insurance," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(3), pages 681-703, July.
  4. Fernandes, Ana & Phelan, Christopher, 2000. "A Recursive Formulation for Repeated Agency with History Dependence," Journal of Economic Theory, Elsevier, Elsevier, vol. 91(2), pages 223-247, April.
  5. Noah Williams, 2004. "On Dynamic Principal-Agent Problems in Continuous Time," Levine's Bibliography 122247000000000426, UCLA Department of Economics.
  6. Chiappori, Pierre-Andre & Macho, Ines & Rey, Patrick & Salanie, Bernard, 1994. "Repeated moral hazard: The role of memory, commitment, and the access to credit markets," European Economic Review, Elsevier, Elsevier, vol. 38(8), pages 1527-1553, October.
  7. Hopenhayn, Hugo A & Nicolini, Juan Pablo, 1997. "Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 105(2), pages 412-38, April.
  8. Spear, Stephen E & Srivastava, Sanjay, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 54(4), pages 599-617, October.
  9. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, Econometric Society, vol. 53(1), pages 69-76, January.
  10. Cole, Harold L & Kocherlakota, Narayana R, 2001. "Efficient Allocations with Hidden Income and Hidden Storage," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 68(3), pages 523-42, July.
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