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

  • ETIENNE LEHMANN
  • BRUNO VAN DER LINDEN

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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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-9779.2007.00335.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): 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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  18. Fredriksson, Peter & Holmlund, Bertil, 2001. "Optimal Unemployment Insurance in Search Equilibrium," Journal of Labor Economics, University of Chicago Press, vol. 19(2), pages 370-99, April.
  19. Boone, Jan & Bovenberg, Lans, 2002. "Optimal labour taxation and search," Journal of Public Economics, Elsevier, vol. 85(1), pages 53-97, July.
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