Optimal Unemployment Insurance in GE: a RobustCalibration Approach
AbstractThis paper implements a simple Monte Carlo calibration approach to quantitatively study the Hansen and Imrohoroglu (1992) economy, a GE model with uninsurable employment risk, designed to assess the optimal replacement rate for a public Unemployment Insurance scheme. The results of this sensitivity analysis are consistent with the original findings, but with several caveats. One novel result in particular is that the sampling distribution of the optimal UI is bimodal. Depending on the calibrated parameters, the optimal UI is in one of two regions: a very generous scheme with high replacement rates, where insurance is mainly provided by the UI scheme, or one with low replacement rates, where insurance is mainly achieved through self-insurance. Even in the absence of moral hazard, it is never optimal to provide full insurance. Moreover, for many plausible parameters` conÂ…gurations, the welfare maximizing replacement rate does not decrease with the level of MH. The qualitative patterns and quantitative fiÂ…ndings are not altered substantially when considering an enlarged labor force, which includes the marginally attached workers. Finally, the parameters representing the hours worked, the leisure share in the households` consumption bundle, and the risk aversion have a fiÂ…rst order impact on the average welfare. The determination of the optimal UI scheme depends heavily on them. This fiÂ…nding suggests that extra caution should be paid when calibrating these parameters in similar environments.
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Bibliographic InfoPaper provided by Queen's University, Department of Economics in its series Working Papers with number 1272.
Length: 61 pages
Date of creation: Aug 2011
Date of revision:
Publication status: Published in the Economics Letters, Vol. 117 (1), pp. 28-31.
Calibration methods; Unemployment Risk; Optimal Unemployment Insurance; Heterogeneous Agents; Incomplete Markets; Computable General Equilibrium; Monte Carlo;
Other versions of this item:
- Cozzi, Marco, 2012. "Optimal unemployment insurance in GE: A robust calibration approach," Economics Letters, Elsevier, vol. 117(1), pages 28-31.
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
- D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-08-29 (All new papers)
- NEP-CMP-2011-08-29 (Computational Economics)
- NEP-DGE-2011-08-29 (Dynamic General Equilibrium)
- NEP-IAS-2011-08-29 (Insurance Economics)
- NEP-LAB-2011-08-29 (Labour Economics)
- NEP-MAC-2011-08-29 (Macroeconomics)
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