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On the Optimality of Search Matching Equilibrium When Workers Are Risk Averse


This paper revisits the normative properties of search-matching economies when homogeneous workers have concave utility functions and wages are bargained over. The optimal allocation of resources is characterized first when information is perfect and second when search effort is not observable. In the former case, employees should be unable to extract a rent. The optimal marginal tax rate is then 100%. As search effort becomes unobservable, an appropriate positive rent is needed and the optimal marginal tax rate is lower. Moreover, the pretax wage is lower in order to boost labor demand. Finally, in both cases, nonlinear income taxation is a key complement to unemployment insurance. Copyright 2007 Blackwell Publishing, Inc..

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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): 5 (October)
Pages: 867-884

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Handle: RePEc:bla:jpbect:v:9:y:2007:i:5:p:867-884
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  1. Fredriksson, P. & Holmlund, B., 1998. "Optimal Unemployment Insurance in Search Equilibrium," Papers 1998-2, Uppsala - Working Paper Series.
  2. Lockwood, Ben & Manning, Alan, 1993. "Wage setting and the tax system theory and evidence for the United Kingdom," Journal of Public Economics, Elsevier, vol. 52(1), pages 1-29, August.
  3. Boone, J. & Fredriksson, P. & Holmlund, B. & van Ours, J.C., 2007. "Optimal unemployment insurance with monitoring and sanctions," Other publications TiSEM f2b1b916-41f5-4964-bad8-3, Tilburg University, School of Economics and Management.
  4. Cahuc, Pierre & Lehmann, Etienne, 2000. "Should unemployment benefits decrease with the unemployment spell?," Journal of Public Economics, Elsevier, vol. 77(1), pages 135-153, July.
  5. Boone, J. & Bovenberg, A.L., 2000. "Optimal Labour Taxation and Search," Discussion Paper 2000-17, Tilburg University, Center for Economic Research.
  6. M. Hungerbühler & E. Lehmann & A. Parmentier & P. Van Der Linden, 2003. "Optimal Income Taxation in an Equilibrium Unemployment Model : Mirrlees meets Pissarides," Working Papers ERMES 0306, ERMES, University Paris 2.
  7. Boone, J. & Bovenberg, A.L., 2002. "The Optimal Taxation of UnskilIed Labor with Job Search and Social Assistance," Discussion Paper 2002-57, Tilburg University, Center for Economic Research.
  8. Barbara Petrongolo & Christopher Pissarides, 2000. "Looking into the black box: a survey of the matching function," LSE Research Online Documents on Economics 2122, London School of Economics and Political Science, LSE Library.
  9. Holmlund, Bertil, 1997. "Unemployment Insurance in Theory and Practice," Working Paper Series 1997:25, Uppsala University, Department of Economics.
  10. Hopenhayn, Hugo A & Nicolini, Juan Pablo, 1997. "Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 412-38, April.
  11. repec:tpr:qjecon:v:117:y:2002:i:3:p:1039-1073 is not listed on IDEAS
  12. Emmanuel Saez, 2000. "Optimal Income Transfer Programs: Intensive Versus Extensive Labor Supply Responses," NBER Working Papers 7708, National Bureau of Economic Research, Inc.
  13. Boone, Jan & van Ours, Jan C., 2000. "Modeling Financial Incentives to Get Unemployed Back to Work," IZA Discussion Papers 108, Institute for the Study of Labor (IZA).
  14. Pissarides, Christopher A., 1998. "The impact of employment tax cuts on unemployment and wages; The role of unemployment benefits and tax structure," European Economic Review, Elsevier, vol. 42(1), pages 155-183, January.
  15. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  16. Fuest, Clemens & Huber, Bernd, 2000. "Is tax progression really good for employment? A model with endogenous hours of work," Munich Reprints in Economics 20296, University of Munich, Department of Economics.
  17. Robin Boadway & Katherine Cuff, 1999. "Monitoring Job Search as an Instrument For Targeting Transfers," International Tax and Public Finance, Springer, vol. 6(3), pages 317-337, August.
  18. Alan Manning, 2001. "Monopsony and the Efficiency of Labour Market Interventions," CEP Discussion Papers dp0514, Centre for Economic Performance, LSE.
  19. Sorensen, Peter Birch, 1999. "Optimal tax progressivity in imperfect labour markets," Labour Economics, Elsevier, vol. 6(3), pages 435-452, September.
  20. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
  21. Jan Boone & Ruud A. De Mooij, 2000. "Tax Policy in a Model of Search with Training," CESifo Working Paper Series 232, CESifo Group Munich.
  22. Steven Shavell & Laurence Weiss, 1978. "The Optimal Payment of Unemployment Insurance Benefits over Time," Cowles Foundation Discussion Papers 503, Cowles Foundation for Research in Economics, Yale University.
  23. Sherwin Rosen, 1985. "Implicit Contracts: A Survey," NBER Working Papers 1635, National Bureau of Economic Research, Inc.
  24. Holmlund, B. & Kolm, A.S., 1995. "Progressive Taxation, Wage Setting, and Unemployment , Theory and Swedish Evidence," Papers 1995-15, Uppsala - Working Paper Series.
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