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Should UI Benefits Really Fall over Time?

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  • John Hassler
  • José V. Rodriguez Mora

Abstract

The issue of whether unemployment benefits should increase or decrease over the unemployment spell is analyzed in an analytically tractable model allowing moral hazard, adverse selection and hidden savings. Analytical results show that when the search productivity of unemployed is constant over the unemployment spell, benefits should typically increase or be constant. The only exception is when there is moral hazard and no hidden savings. In general, adverse selection problems calls for increasing benefits, moral hazard problems for constant benefits and decreasing search productivity for decreasing benefits.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2002/wp-cesifo-2002-10/cesifo_wp804.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 804.

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Date of creation: 2002
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Handle: RePEc:ces:ceswps:_804

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Related research

Keywords: unemployment benefits; search; moral hazard; adverse selection;

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References

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  1. Abraham, Arpad & Pavoni, Nicola, 2004. "Efficient Allocations with Moral Hazard and Hidden Borrowing and Lending," Working Papers 04-05, Duke University, Department of Economics.
  2. Hassler, John & Mora, José V Rodríguez & Storesletten, Kjetil & Zilibotti, Fabrizio, 2001. "A Positive Theory of Geographic Mobility and Social Insurance," CEPR Discussion Papers 2964, C.E.P.R. Discussion Papers.
  3. Fredriksson, P. & Holmlund, B., 1998. "Optimal Unemployment Insurance in Search Equilibrium," Papers 1998-2, Uppsala - Working Paper Series.
  4. Steven Shavell & Laurence Weiss, 1978. "The Optimal Payment of Unemployment Insurance Benefits over Time," Cowles Foundation Discussion Papers 503, Cowles Foundation for Research in Economics, Yale University.
  5. McCormick, Barry, 1997. "Regional unemployment and labour mobility in the UK," European Economic Review, Elsevier, vol. 41(3-5), pages 581-589, April.
  6. Burkhard Heer, 2000. "Employment And Welfare Effects Of A Two-Tier Unemployment Compensation System," Computing in Economics and Finance 2000 3, Society for Computational Economics.
  7. 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.
  8. Pavoni, Nicola, 2007. "On optimal unemployment compensation," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1612-1630, September.
  9. Dale T. Mortensen, 1977. "Unemployment insurance and job search decisions," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 30(4), pages 505-517, July.
  10. Engen, Eric M. & Gruber, Jonathan, 2001. "Unemployment insurance and precautionary saving," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 545-579, June.
  11. Hassler, John & Rodriguez Mora, Jose V., 1999. "Employment turnover and the public allocation of unemployment insurance," Journal of Public Economics, Elsevier, vol. 73(1), pages 55-83, July.
  12. 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, vol. 5(3), pages 681-703, July.
  13. Cullen, Julie Berry & Gruber, Jonathan, 2000. "Does Unemployment Insurance Crowd Out Spousal Labor Supply?," Journal of Labor Economics, University of Chicago Press, vol. 18(3), pages 546-72, July.
  14. Cahuc, Pierre & Lehmann, Etienne, 2000. "Should unemployment benefits decrease with the unemployment spell?," Journal of Public Economics, Elsevier, vol. 77(1), pages 135-153, July.
  15. Pissarides, Christopher A & Wadsworth, Jonathan, 1989. "Unemployment and the Inter-regional Mobility of Labour," Economic Journal, Royal Economic Society, vol. 99(397), pages 739-55, September.
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Cited by:
  1. Peter Fredriksson & Bertil Holmlund, 2006. "Improving Incentives in Unemployment Insurance: A Review of Recent Research," Journal of Economic Surveys, Wiley Blackwell, vol. 20(3), pages 357-386, 07.
  2. Christian Holzner & Volker Meier & Martin Werding, 2010. "Time Limits in a Two-tier Unemployment Benefit Scheme under Involuntary Unemployment," CESifo Economic Studies, CESifo, vol. 56(2), pages 251-277, June.
  3. Hagedorn, Marcus & Kaul, Ashok & Mennel, Tim, 2002. "An adverse selection model of optimal unemployment insurance," ZEI Working Papers B 30-2002, ZEI - Center for European Integration Studies, University of Bonn.
  4. Fredriksson, Peter & Holmlund, Bertil, 2005. "Optimal unemployment insurance design: time limits, monitoring, or workfare?," Working Paper Series 2005:13, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  5. Hagedorn, Marcus & Kaul, Ashok & Mennel, Tim, 2002. "An Adverse Selection Model of Optimal Unemployment Insurance," IZA Discussion Papers 681, Institute for the Study of Labor (IZA).
  6. Hassler, John & Rodríguez Mora, José Vicente, 2007. "Unemployment Insurance Design: Inducing Moving and Retraining," CEPR Discussion Papers 6364, C.E.P.R. Discussion Papers.
  7. Christian Holzner & Volker Meier & Martin Werding, 2004. "Time Limits on Welfare Use under Involuntary Unemployment," CESifo Working Paper Series 1220, CESifo Group Munich.

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