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An Adverse Selection Model of Optimal Unemployment Insurance

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  • Marcus Hagedorn
  • Ashok Kaul
  • Tim Mennel

Abstract

We ask whether offering a menu of unemployment insurance contracts is welfare improving in a heterogeneous population. We adopt a repeated moral-hazard framework as in Shavell/Weiss (1979) supplemented by unobserved heterogeneity about agents’ job opportunities. Our main theoretical contribution is an analytical characterization of the sets of jointly feasible entitlements that renders an efficient computation of these sets feasible. Our main economic result is that optimal contracts for ”bad” searchers tend to be upward-sloping due to an adverse-selection effect. This is in contrast to the well-known optimal decreasing time-profile of benefits in pure moral hazard environments that continue to be optimal for ”good” searchers in our model.

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Bibliographic Info

Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 237.

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Handle: RePEc:zur:iewwpx:237

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Keywords: Unemployment Insurance; Recursive Contracts; Adverse Selection; Repeated Moral Hazard;

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  1. Mortensen, Dale T., 1983. "A welfare analysis of unemployment insurance: Variations on second-best themes," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 19(1), pages 67-97, January.
  2. Andrew Atkeson & Robert E Lucas, 2010. "On Efficient Distribution with Private Information," Levine's Working Paper Archive 2179, David K. Levine.
  3. Fernandes, Ana & Phelan, Christopher, 2000. "A Recursive Formulation for Repeated Agency with History Dependence," Journal of Economic Theory, Elsevier, vol. 91(2), pages 223-247, April.
  4. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
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  10. 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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  14. Jullien, Bruno, 1997. "Participation Constraints in Adverse Selection Models," IDEI Working Papers 67, Institut d'Économie Industrielle (IDEI), Toulouse.
  15. 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.
  16. 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.
  17. Spear, Stephen E & Srivastava, Sanjay, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 599-617, October.
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  23. Chang, Roberto, 1998. "Credible Monetary Policy in an Infinite Horizon Model: Recursive Approaches," Journal of Economic Theory, Elsevier, vol. 81(2), pages 431-461, August.
  24. Kenneth L. Judd & Sevin Yeltekin & James Conklin, 2003. "Computing Supergame Equilibria," Econometrica, Econometric Society, vol. 71(4), pages 1239-1254, 07.
  25. Abreu, Dilip & Pearce, David & Stacchetti, Ennio, 1990. "Toward a Theory of Discounted Repeated Games with Imperfect Monitoring," Econometrica, Econometric Society, vol. 58(5), pages 1041-63, September.
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Cited by:
  1. Jean-Olivier Hairault & François Langot & Sébastien Ménard & Thepthida Sopraseuth, 2012. "Optimal Unemployment Insurance for Older Workers," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00856144, HAL.
  2. repec:tep:teppwp:wp1021 is not listed on IDEAS
  3. Laun, Tobias, 2012. "Optimal Social Insurance with Endogenous Health," Working Paper Series in Economics and Finance 742, Stockholm School of Economics, revised 28 Apr 2012.
  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. 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.
  6. Hagedorn, Marcus & Kaul, Ashok & Mennel, Tim, 2010. "An adverse selection model of optimal unemployment insurance," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 490-502, March.
  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.

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