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An Adverse Selection Model of Optimal Unemployment Insurance

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Author Info
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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Paper provided by Institute for Empirical Research in Economics - IEW in its series IEW - Working Papers with number iewwp315.

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

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

Find related papers by JEL classification:
J65 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment Insurance; Severance Pay; Plant Closings
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - 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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