An adverse selection model of optimal unemployment insurance
AbstractWe derive the shape of optimal unemployment insurance (UI) contracts when agents can exert search effort but face different search costs and have private information about their type. We derive a recursive solution of our dynamic 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 an information rent and that the bad searcher receives the minimal entitlement. From a methodological point of view, we achieve a precise characterization of the sets of jointly feasible entitlements. This allows us to map our analytical results one-toone 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 InfoPaper provided by ZEI - Center for European Integration Studies, University of Bonn in its series ZEI Working Papers with number B 30-2002.
Date of creation: 2002
Date of revision:
Unemployment Insurance; Adverse Selection; Moral Hazard;
Find related papers by JEL classification:
- J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
- J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
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