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On the optimality of search matching equilibrium when workers are risk averse

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  • Etienne LEHMANN

    (Creuset, Université de Saint-Etienne, and Eurequa, Université Paris 1 and Ermes, Université Paris 2)

  • Bruno VAN DER LINDEN

    (FNRS - Belgium and UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) - Belgium)

Abstract

This papers revisits the normative properties of search-matching economies when workers have concave utility functions. A general equilibrium framework is developed where agents are homogeneous and wages are bargained over. Assuming lump-sum taxation of profits, the optimal allocation of resources is characterized first when information is perfect and second when unemployed people freely choose their search effort. Compared to the first case, the optimum is characterized by imperfect unemployment insurance and lower levels of search intensity and output in the second setting. To decenralize these optima, employees should be unable to extract a rent when information is perfect. An appropriate positive rent is however needed in the second case. When the bargaining power of the workers is given, these outcomes can be implemented through a well-designed non-linear tax schedule and an appropriate level of unemployment benefits. According to the level of the bargaining power, taxation can be progressive or regressive. Negative marginal tax rates are even needed for sufficiently low levels of the bargaining power.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 2002023.

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Length: 29
Date of creation: 01 Aug 2002
Date of revision:
Handle: RePEc:ctl:louvir:2002023

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Web page: http://www.uclouvain.be/ires
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Keywords: Unemployment; Non-linear Taxation; Unemployment Benefits; Moral Hazard; Search; Matching;

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References

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