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Unemployment Insurance with Hidden Savings

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  • Mitchell, Matthew
  • Zhang, Yuzhe

Abstract

This paper studies the design of unemployment insurance when neither the searching effort nor the savings of an unemployed agent can be monitored. If the principal could monitor the savings, the optimal policy would leave the agent savings-constrained. With a constant absolute risk-aversion (CARA) utility function, we obtain a closed form solution of the optimal contract. Under the optimal contract, the agent is neither saving nor borrowing constrained. Counter-intuitively, his consumption declines faster than implied by Hopenhayn and Nicolini [4]. The efficient allocation can be implemented by an increasing benefit during unemployment and a constant tax during employment.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 23214.

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Date of creation: Mar 2010
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Handle: RePEc:pra:mprapa:23214

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Keywords: hidden savings; hidden wealth; repeated moral hazard; unemployment insurance.;

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  1. Steven Shavell & Laurence Weiss, 1978. "The Optimal Payment of Unemployment Insurance Benefits over Time," Cowles Foundation Discussion Papers 503, Cowles Foundation for Research in Economics, Yale University.
  2. Abraham Arpad & Nicola Pavoni, 2004. "Efficient Allocations, with Moral Hazard and Hidden Borrowing and Lending," Levine's Bibliography 122247000000000138, UCLA Department of Economics.
  3. Noah Williams, 2004. "On Dynamic Principal-Agent Problems in Continuous Time," Levine's Bibliography 122247000000000426, UCLA Department of Economics.
  4. David Card & Raj Chetty & Andrea Weber, 2006. "Cash-on-Hand and Competing Models of Intertemporal Behavior: New Evidence from the Labor Market," NBER Working Papers 12639, National Bureau of Economic Research, Inc.
  5. Narayana Kocherlakota, 2010. "Figuring out the impact of hidden savings on optimal unemployment insuranc," Levine's Working Paper Archive 506439000000000291, David K. Levine.
  6. Abraham, A & Pavoni, N, 2008. "Efficient allocations with moral hazard and hidden borrowing and lending: A recursive formulation," Open Access publications from University College London http://discovery.ucl.ac.u, University College London.
  7. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January.
  8. Árpád Ábrahám & Nicola Pavoni, 2008. "Optimal Income Taxation and Hidden Borrowing and Lending: The First-Order Approach in Two Periods," Carlo Alberto Notebooks 102, Collegio Carlo Alberto.
  9. Hopenhayn, Hugo A & Nicolini, Juan Pablo, 1997. "Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 412-38, April.
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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Unemployment Insurance with Hidden Savings
    by Christian Zimmermann in NEP-DGE blog on 2010-06-23 07:09:58
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Cited by:
  1. Sebastian Koehne & Nicola Pavoni & Arpad Abraham, 2010. "On the First-Order Approach in Principal-Agent Models with Hidden Borrowing and Lending," 2010 Meeting Papers 947, Society for Economic Dynamics.
  2. Abraham, A & Pavoni, N, 2008. "Efficient allocations with moral hazard and hidden borrowing and lending: A recursive formulation," Open Access publications from University College London http://discovery.ucl.ac.u, University College London.
  3. David L. Fuller, 2010. "Adverse Selection and Moral Hazard: Quantitative Implications for Unemployment Insurance," Working Papers 12004, Concordia University, Department of Economics, revised Sep 2011.

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