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Search and Work in Optimal Welfare Programs

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  • Pavoni, Nicola
  • Setty, Ofer
  • Violante, Giovanni L

Abstract

Some existing welfare programs (“work-first”) require participants to work in exchange for benefits. Others (“job search-first”) emphasize private job-search and provide assistance in finding and retaining a durable employment. This paper studies the optimal design of welfare programs when (i) the principal/government is unable to observe the agent’s effort, but can assist the agent’s job search and can mandate the agent to work, and (ii) agents’ skills depreciate during unemployment. In the optimal welfare program, assisted search is implemented between an initial spell of private search (unemployment insurance) and a final spell of pure income support where search effort is not elicited. To be effective, job-search assistance requires large reemployment subsidies. The optimal program features compulsory work activities for low levels of program’s generosity (i.e., its promised utility or available budget). The threat of mandatory work acts like a punishment that facilitates the provision of search incentives without compromising consumption smoothing too much.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9389.

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Date of creation: Mar 2013
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Handle: RePEc:cpr:ceprdp:9389

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Keywords: Moral Hazard; Recursive Contracts; Search; Welfare Program; Work;

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  1. Nicola Pavoni & G. L. Violante, 2007. "Optimal Welfare-to-Work Programs," Review of Economic Studies, Oxford University Press, vol. 74(1), pages 283-318.
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Cited by:
  1. Moritz Kuhn & Sebastian Koehne, 2012. "Should unemployment insurance be asset-tested?," 2012 Meeting Papers 850, Society for Economic Dynamics.
  2. Johannes F. Schmieder & Till M. von Wachter & Stefan Bender, 2013. "The Causal Effect of Unemployment Duration on Wages: Evidence from Unemployment Insurance Extensions," NBER Working Papers 19772, National Bureau of Economic Research, Inc.

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