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Incentive Contracts and Efficient Unemployment Benefits

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  • Demougin, Dominique
  • Helm, Carsten

Abstract

Several European countries have reformed their labor market institutions. Incentive effects of unemployment benefits have been an important aspect of these reforms. We analyze this issue in a principal-agent model, focusing on unemployment levels and labor productivity. In our model, a higher level of unemployment benefits improves the worker's position in wage bargaining, leading to stronger effort incentives and higher output. However, it also reduces incentives for labor market participation. Accordingly, there is a trade-off. We analyze how changes in the economic environment such as globalization and better educated workers affect this trade-off.

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Bibliographic Info

Paper provided by Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute of Economics (VWL) in its series Darmstadt Discussion Papers in Economics with number 35490.

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Date of creation: Mar 2008
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Publication status: Published in Darmstadt Discussion Papers in Economics . 191 (2008-03)
Handle: RePEc:dar:ddpeco:35490

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Keywords: Unemployment benefits; incentive contracts; Nash bargaining; moral hazard; globalisation;

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References

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Cited by:
  1. Bental, Benjamin & Demougin, Dominique, 2010. "Declining labor shares and bargaining power: An institutional explanation," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 443-456, March.
  2. Michael Funke & Marc Gronwald, 2009. "A Convex Hull Approach to Counterfactual Analysis of Trade Openness and Growth," Quantitative Macroeconomics Working Papers 20906, Hamburg University, Department of Economics.

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