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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 315.

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Date of creation: Mar 2007
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Handle: RePEc:zur:iewwpx:315

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

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  3. Ana Fernandes & Christopher Phelan, 1999. "A recursive formulation for repeated agency with history dependence," Staff Report, Federal Reserve Bank of Minneapolis 259, Federal Reserve Bank of Minneapolis.
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Citations

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Cited by:
  1. Marcus Hagedorn & Ashok Kaul & Tim Mennel, 2007. "An Adverse Selection Model of Optimal Unemployment Insurance," IEW - Working Papers, Institute for Empirical Research in Economics - University of Zurich 315, Institute for Empirical Research in Economics - University of Zurich.
  2. Fuller, David L., 2014. "Adverse selection and moral hazard: Quantitative implications for unemployment insurance," Journal of Monetary Economics, Elsevier, Elsevier, vol. 62(C), pages 108-122.
  3. O'Flaherty, Brendan, 2009. "When should homeless families get subsidized apartments? A theoretical inquiry," Journal of Housing Economics, Elsevier, Elsevier, vol. 18(2), pages 69-80, June.
  4. Hairault, Jean-Olivier & Langot, François & Ménard, Sébastien & Sopraseuth, Thepthida, 2011. "Optimal Unemployment Insurance for Older Workers," CEPREMAP Working Papers (Docweb), CEPREMAP 1107, CEPREMAP.
  5. Tobias Laun, 2012. "Optimal Social Insurance with Endogenous Health," 2012 Meeting Papers, Society for Economic Dynamics 438, Society for Economic Dynamics.
  6. Anne Bucher & Sébastien Ménard, 2010. "Employment Protection Legislation and Adverse Selection at the Labor Market Entry," Working Papers halshs-00812099, HAL.
  7. 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) hal-00668989, HAL.
  8. 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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