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Optimal Unemployment Insurance with Monitoring

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  • Ofer Setty

    (Tel Aviv University)

Abstract

I study a principal-agent problem in which the principal can obtain additional costly information about the agent's effort. I analyze this problem in the context of optimal unemployment insurance a la Hopenhayn and Nicolini (1997), where job-search effort is private information. I calibrate the model to the US economy and use it for two purposes. First, I show that for CRRA utility, the optimal contract dictates that monitoring frequency increases and the sanction decreases with promised utility, if and only if the coefficient of risk aversion is greater than 0.5. Second, I show that compared to optimal unemployment insurance and estimated at the balanced budget point, monitoring saves about eighty percent of the cost associated with moral hazard.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 26.

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Date of creation: 2013
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Handle: RePEc:red:sed013:26

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References

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  1. van den Berg, Gerard J & van der Klaauw, Bas & van Ours, Jan C, 2000. "Punitive Sanctions and the Transition Rate From Welfare to Work," CEPR Discussion Papers 2447, C.E.P.R. Discussion Papers.
  2. Boone, Jan & Fredriksson, Peter & Holmlund, Bertil & van Ours, Jan C., 2001. "Optimal Unemployment Insurance with Monitoring and Sanctions," IZA Discussion Papers 401, Institute for the Study of Labor (IZA).
  3. Gerard J. van den Berg & Bas van der Klaauw, 2006. "Counseling And Monitoring Of Unemployed Workers: Theory And Evidence From A Controlled Social Experiment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 895-936, 08.
  4. Atila Abdulkadiroglu & Burhanettin Kuruscu & Aysegul Sahin, 2002. "Unemployment Insurance and the Role of Self-Insurance," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(3), pages 681-703, July.
  5. van den Berg, Gerard J, 1994. "The Effects of Changes of the Job Offer Arrival Rate on the Duration of Unemployment," Journal of Labor Economics, University of Chicago Press, vol. 12(3), pages 478-98, July.
  6. Fougère, Denis & Pradel, Jacqueline & Roger, Muriel, 2005. "Does Job-Search Assistance Affect Search Effort and Outcomes? A Microeconometric Analysis of Public versus Private Search Methods," IZA Discussion Papers 1825, Institute for the Study of Labor (IZA).
  7. Jaap H. Abbring & Gerard J. Berg & Jan C. Ours, 2005. "The Effect of Unemployment Insurance Sanctions on the Transition Rate from Unemployment to Employment," Economic Journal, Royal Economic Society, vol. 115(505), pages 602-630, 07.
  8. 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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  1. Optimal unemployment insurance monitoring
    by Economic Logician in Economic Logic on 2009-11-30 15:12:00
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Cited by:
  1. Setty, Ofer, 2012. "Unemployment accounts," MPRA Paper 38064, University Library of Munich, Germany.
  2. Bart Cockx & Muriel Dejemeppe & Andrey Launov & Bruno Van der Linden, 2011. "Monitoring, Sanctions and Front-Loading of Job Search in a Non-Stationary Model," CESifo Working Paper Series 3660, CESifo Group Munich.
  3. David L. Fuller & B. Ravikumar & Yuzhe Zhang, 2012. "Unemployment insurance fraud and optimal monitoring," Working Papers 2012-024, Federal Reserve Bank of St. Louis.
  4. Pavoni, Nicola & Setty, Ofer & Violante, Giovanni L, 2013. "Search and Work in Optimal Welfare Programs," CEPR Discussion Papers 9389, C.E.P.R. Discussion Papers.

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