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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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Postal: Place Montesquieu 3, 1348 Louvain-la-Neuve (Belgium)
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Web page: http://www.uclouvain.be/ires
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Related research

Keywords: Unemployment; Non-linear Taxation; Unemployment Benefits; Moral Hazard; Search; Matching;

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References

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  1. Boone, J. & Bovenberg, A.L., 2002. "The Optimal Taxation of Unskilled Labor with Job Search and Social Assistance," Open Access publications from Tilburg University urn:nbn:nl:ui:12-90151, Tilburg University.
  2. Petrongolo, Barbara & Pissarides, Christopher, 2000. "Looking Into The Black Box: A Survey Of The Matching Function," CEPR Discussion Papers 2409, C.E.P.R. Discussion Papers.
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  7. Boone, Jan & Bovenberg, A Lans, 2001. "Optimal Labour Taxation and Search," CEPR Discussion Papers 3002, C.E.P.R. Discussion Papers.
  8. Christopher A. Pissarides, 1997. "The Impact of Employment Tax Cuts on Unemployment and Wages: The Role of Unemployment Benefits and Tax Structure," CEP Discussion Papers dp0361, Centre for Economic Performance, LSE.
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  15. Jan Boone & Ruud de Mooij, 2000. "Tax policy in a model of search with training," CPB Research Memorandum 161, CPB Netherlands Bureau for Economic Policy Analysis.
  16. Boone, Jan & van Ours, Jan C., 2000. "Modeling Financial Incentives to Get Unemployed Back to Work," IZA Discussion Papers 108, Institute for the Study of Labor (IZA).
  17. Lockwood, Ben & Manning, Alan, 1993. "Wage setting and the tax system theory and evidence for the United Kingdom," Journal of Public Economics, Elsevier, vol. 52(1), pages 1-29, August.
  18. Robin Boadway & Katherine Cuff, 1999. "Monitoring Job Search as an Instrument for Targeting Transfers," Working Papers 982, Queen's University, Department of Economics.
  19. Sorensen, Peter Birch, 1999. "Optimal tax progressivity in imperfect labour markets," Labour Economics, Elsevier, vol. 6(3), pages 435-452, September.
  20. 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.
  21. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
  22. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  23. Fuest, Clemens & Huber, Bernd, 2000. "Is tax progression really good for employment? A model with endogenous hours of work," Labour Economics, Elsevier, vol. 7(1), pages 79-93, January.
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