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Unemployment Insurance with Moral Hazard in a Dynamic Economy

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Author Info
Stephen Williamson (Economics: University of Iowa)
Cheng Wang (Iowa City, IA 52242)

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Abstract

We study a dynamic model with positive gross flows between employment and unemployment. There is moral hazard associated with search effort and job-retention effort. A quantitative comparison of the unemployment insurance system currently in place in the United States with an optimal system shows that the optimal system reduces the steady state unemployment rate by 3.40 percentage points and increases output by 3.64\%. The optimal system involves a large subsidy for a transition from unemployment to employment and a large penalty for a transition from employment to unemployment.

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Paper provided by EconWPA in its series Macroeconomics with number 9506002.

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Date of creation: 15 Jun 1995
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Handle: RePEc:wpa:wuwpma:9506002

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Find related papers by JEL classification:
E - Macroeconomics and Monetary Economics

This item is featured on the following reading lists:

  1. Advanced Monetary Theory and Policy (ECON 447)
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Albrecht, James W & Axell, Bo, 1984. "An Equilibrium Model of Search Unemployment," Journal of Political Economy, University of Chicago Press, vol. 92(5), pages 824-40, October. [Downloadable!] (restricted)
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  2. Wang, Cheng, 1995. "Dynamic Insurance with Private Information and Balanced Budgets," Review of Economic Studies, Blackwell Publishing, vol. 62(4), pages 577-95, October. [Downloadable!] (restricted)
  3. Phelan, Christopher, 1994. "Incentives and Aggregate Shocks," Review of Economic Studies, Blackwell Publishing, vol. 61(4), pages 681-700, October. [Downloadable!] (restricted)
  4. Carl Davidson & Stephen A. Woodbury, 1995. "Optimal Unemployment Insurance," Staff Working Papers 95-35, W.E. Upjohn Institute for Employment Research. [Downloadable!] (restricted)
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  5. Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 53(6), pages 1357-67, November. [Downloadable!] (restricted)
  6. Spear, Stephen E & Srivastava, Sanjay, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Blackwell Publishing, vol. 54(4), pages 599-617, October. [Downloadable!] (restricted)
  7. Phelan, C. & Townsend, R.M., 1990. "Computing Multiperiod, Information-Constrained Optima," University of Chicago - Economics Research Center 90-13, Chicago - Economics Research Center.
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  8. Topel, Robert H, 1984. "Experience Rating of Unemployment Insurance and the Incidence of Unemployment," Journal of Law & Economics, University of Chicago Press, vol. 27(1), pages 61-90, April.
  9. Atkeson, Andrew & Lucas, Robert E, Jr, 1992. "On Efficient Distribution with Private Information," Review of Economic Studies, Blackwell Publishing, vol. 59(3), pages 427-53, July. [Downloadable!] (restricted)
  10. Dale T. Mortensen, 1983. "A Welfare Analysis of Unemployment Insurance: Variations on Second Best Themes," Discussion Papers 549, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
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  11. Narayana Kocherlakota, 1993. "Efficient Bilateral Risk Sharing Without Commitment," Macroeconomics 9311001, EconWPA. [Downloadable!]
  12. Abowd, John M & Zellner, Arnold, 1985. "Estimating Gross Labor-Force Flows," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(3), pages 254-83, June.
  13. Shavell, Steven & Weiss, Laurence, 1979. "The Optimal Payment of Unemployment Insurance Benefits over Time," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1347-62, December. [Downloadable!] (restricted)
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  14. Hansen, G.D. & Imrohoroglu, A., 1990. "The Role Of Unemployment Insurance In An Economy With Liquidity Constraints And Moral Hazard," Papers 21, California Los Angeles - Applied Econometrics.
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  15. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring. [Downloadable!] (restricted)
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