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An Adverse Selection Model of Optimal Unemployment Insurance

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  • Marcus Hagedorn
  • Ashok Kaul

Abstract

We derive the shape of optimal unemployment insurance contracts when agents can exert search effort but have private information about their search technology. We derive a recursive solution of our 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 the minimal entitlement. Our main theoretical contribution is a numerically useful analytical 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 Society for Economic Dynamics in its series 2004 Meeting Papers with number 331.

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Date of creation: 2004
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Handle: RePEc:red:sed004:331

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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Web page: http://www.EconomicDynamics.org/society.htm
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Keywords: Unemployment Insurance; Adverse Selection; Repeated Moral Hazard;

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References

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  1. Hassler, John & Rodriguez Mora, José V., 2002. "Should UI Benefits Really Fall Over Time?," IZA Discussion Papers 622, Institute for the Study of Labor (IZA).
  2. Andrew Atkeson & Robert E Lucas, 2010. "On Efficient Distribution with Private Information," Levine's Working Paper Archive 2179, David K. Levine.
  3. 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.
  4. Williamson, Stephen D. & Wang, Cheng, 1999. "Moral Hazard, Optimal Unemployment Insurance, and Experience Rating," Working Papers 99-03, University of Iowa, Department of Economics.
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Cited by:
  1. Jean-Olivier Hairault & François Langot & Sébastien Ménard & Thepthida Sopraseuth, 2012. "Optimal Unemployment Insurance for Older Workers," PSE - Labex "OSE-Ouvrir la Science Economique" halshs-00856144, HAL.
  2. Marcus Hagedorn & Ashok Kaul, 2004. "An Adverse Selection Model of Optimal Unemployment Insurance," 2004 Meeting Papers 331, Society for Economic Dynamics.
  3. 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.
  4. 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.
  5. Tobias Laun, 2012. "Optimal Social Insurance with Endogenous Health," 2012 Meeting Papers 438, Society for Economic Dynamics.
  6. Anne Bucher & Sébastien Ménard, 2010. "Employment Protection Legislation and Adverse Selection at the Labor Market Entry," TEPP Working Paper 2010-21, TEPP.
  7. 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.
  8. repec:tep:teppwp:wp1021 is not listed on IDEAS
  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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