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Unemployment Insurance under Moral Hazard and Limited Commitment: Public versus Private Provision

  • JONATHAN P. THOMAS
  • TIM WORRALL

This paper analyzes a model of private unemployment insurance under limited commitment and a model of public unemployment insurance subject to moral hazard in an economy with a continuum of agents and an infinite time horizon. The dynamic and steady-state properties of the optimum private unemployment insurance scheme are established. The interaction between public and private unemployment insurance schemes is examined. Examples are constructed to show that for some parameter values increased public insurance can reduce welfare by crowding out private insurance more than one-to-one and that for other parameter values a mix of both public and private insurance can be welfare maximizing. Copyright 2007 Blackwell Publishing, Inc..

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-9779.2007.00302.x
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Article provided by Association for Public Economic Theory in its journal Journal of Public Economic Theory.

Volume (Year): 9 (2007)
Issue (Month): 1 (02)
Pages: 151-181

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Handle: RePEc:bla:jpbect:v:9:y:2007:i:1:p:151-181
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  1. Hanno Lustig, 2004. "The Market Price of Aggregate Risk and the Wealth Distribution," UCLA Economics Online Papers 299, UCLA Department of Economics.
  2. Ethan Ligon & Jonathan P. Thomas & Tim Worrall, 1998. "Mutual Insurance, Individual Savings and Limited Commitment," Keele Department of Economics Discussion Papers (1995-2001) 98/14, Department of Economics, Keele University.
  3. Diamond, P. A. & Mirrlees, J. A., 1978. "A model of social insurance with variable retirement," Journal of Public Economics, Elsevier, vol. 10(3), pages 295-336, December.
  4. Jonathan Thomas & Tim Worrall, 1988. "Self-Enforcing Wage Contracts," Review of Economic Studies, Oxford University Press, vol. 55(4), pages 541-554.
  5. Dirk Krueger & Fabrizio Perri, 1999. "Risk Sharing: Private Insurance Markets or Redistributive Taxes?," Working Papers 99-04, New York University, Leonard N. Stern School of Business, Department of Economics.
  6. Attanasio, Orazio & Rios-Rull, Jose-Victor, 2000. "Consumption smoothing in island economies: Can public insurance reduce welfare?," European Economic Review, Elsevier, vol. 44(7), pages 1225-1258, June.
  7. Anderberg, Dan & Andersson, Fredrik, 2000. "Social Insurance with Risk-Reducing Investments," Economica, London School of Economics and Political Science, vol. 67(265), pages 37-56, February.
  8. Rafael Di Tella & Robert MacCulloch, 1998. "Informal Family Insurance and the Design of the Welfare State," JCPR Working Papers 44, Northwestern University/University of Chicago Joint Center for Poverty Research.
  9. Arnott, Richard & Stiglitz, Joseph E, 1991. "Moral Hazard and Nonmarket Institutions: Dysfunctional Crowding Out or Peer Monitoring?," American Economic Review, American Economic Association, vol. 81(1), pages 179-90, March.
  10. Whinston, Michael D., 1983. "Moral hazard, adverse selection, and the optimal provision of social insurance," Journal of Public Economics, Elsevier, vol. 22(1), pages 49-71, October.
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