Unemployment Insurance and Precautionary Savings : Transitional Dynamics vs. Steady State Equilibrium
AbstractIn this study, we ask whether the presence of precautionary savings substantially reduces the optimal replacement rate in an economy characterized by equilibrium unemployment and moral hazard. In line with previous studies, the optimality criterion based on comparisons of steady states leads to a low optimal ratio. Yet, this result ignores potential transitional costs due to the necessity for agents to increase their savings and reduce their consumption whenever the ratio is cut. We therefore build a dynamic model taking full account of the transition, and show that steady state optimality is not robust to transitional costs.
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2001 with number 96.
Date of creation: 01 Apr 2001
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equilibrium unemployment; job search; moral hazard; precautionary savings; unemployment insurance;
Find related papers by JEL classification:
- J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
- D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
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- Rasmus Lentz, 2009.
"Optimal Unemployment Insurance in an Estimated Job Search Model with Savings,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 12(1), pages 37-57, January.
- Rasmus Lentz, 2003. "Optimal Unemployment Insurance in an Estimated Job Search Model with Savings," CAM Working Papers 2004-10, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
- Gilles Joseph & Thomas Weitzenblum, 2003. "Optimal Unemployment Insurance: Transitional Dynamics vs. Steady State," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 869-884, October.
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