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An Adverse Selection Model of Optimal Unemployment Insurance

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Author Info

  • Hagedorn, Marcus

    ()
    (University of Oslo)

  • Kaul, Ashok

    ()
    (Saarland University)

  • Mennel, Tim

    ()
    (University of Bonn)

Abstract

We derive the shape of optimal unemployment insurance (UI) contracts when agents can exert search effort but face different search costs and have private information about their type. We derive a recursive solution of our dynamic adverse selection problem with repeated moral hazard. Conditions under which the UI agency should always offer separating contracts are identified. We show that the good searcher receives an information rent and that the bad searcher receives the minimal entitlement. From a methodological point of view, we achieve a precise characterization of the sets of jointly feasible entitlements. This allows us to map our analytical results one-to one to a numerical algorithm. According to our results the contract for the good searcher has a decreasing benefit profile, as the one he would be offered in a pure moral hazard environment. In contrast, the contract of the bad searcher is distorted by an adverse selection effect, so that it tends to have an upward-sloping benefit profile. We provide a comparative static analysis of changes in various parameters of our model.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 681.

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Length: 51 pages
Date of creation: Dec 2002
Date of revision:
Handle: RePEc:iza:izadps:dp681

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Keywords: unemployment insurance; adverse selection; moral hazard;

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References

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  1. Atkeson, Andrew & Lucas, Robert E, Jr, 1992. "On Efficient Distribution with Private Information," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 427-53, July.
  2. Mortensen, Dale T., 1983. "A welfare analysis of unemployment insurance: Variations on second-best themes," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 19(1), pages 67-97, January.
  3. Wang, Cheng & Williamson, Stephen D., 2002. "Moral hazard, optimal unemployment insurance, and experience rating," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1337-1371, October.
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Citations

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Cited by:
  1. Laun, Tobias, 2012. "Optimal Social Insurance with Endogenous Health," Working Paper Series in Economics and Finance 742, Stockholm School of Economics, revised 28 Apr 2012.
  2. Arpad Abraham & Nicola Pavoni, 2008. "Efficient Allocations with Moral Hazard and Hidden Borrowing and Lending: A Recursive Formulation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 781-803, October.
  3. Jean-Olivier Hairault & François Langot & Sébastien Menard & Thepthida Sopraseuth, 2012. "Optimal Unemployment Insurance for Older Workers," TEPP Working Paper 2012-07, TEPP.
  4. 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.
  5. David Fuller, 2008. "Adverse Selection and Moral Hazard: Quanitative Implications for Unemployment Insurance," 2008 Meeting Papers 889, Society for Economic Dynamics.
  6. O'Flaherty, Brendan, 2009. "When should homeless families get subsidized apartments? A theoretical inquiry," Journal of Housing Economics, Elsevier, vol. 18(2), pages 69-80, June.
  7. repec:tep:teppwp:wp1021 is not listed on IDEAS
  8. Anne Bucher & Sébastien Ménard, 2010. "Employment Protection Legislation and Adverse Selection at the Labor Market Entry," TEPP Working Paper 2010-21, TEPP.
  9. Fuller, David L., 2014. "Adverse selection and moral hazard: Quantitative implications for unemployment insurance," Journal of Monetary Economics, Elsevier, vol. 62(C), pages 108-122.

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