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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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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. 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.
  2. Christopher A. Pissarides & Barbara Petrongolo, 2001. "Looking into the Black Box: A Survey of the Matching Function," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 390-431, June.
  3. Boone, J. & Fredriksson, P. & Holmlund, B. & van Ours, J.C., 2001. "Optimal Unemployment Insurance with Monitoring and Sanctions," Discussion Paper 2001-85, Tilburg University, Center for Economic Research.
  4. Shavell, Steven & Weiss, Laurence, 1979. "The Optimal Payment of Unemployment Insurance Benefits over Time," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1347-62, December.
  5. Boone, J. & Bovenberg, A.L., 2004. "The optimal taxation of unskilled labor with job search and social assistance," Other publications TiSEM 23eaec1d-2ceb-483e-98a9-e, Tilburg University, School of Economics and Management.
  6. Emmanuel Saez, 2002. "Optimal Income Transfer Programs: Intensive Versus Extensive Labor Supply Responses," The Quarterly Journal of Economics, MIT Press, vol. 117(3), pages 1039-1073, August.
  7. Jan Boone & Jan C. van Ours, 2000. "Modeling Financial Incentives to Get Unemployed Back to Work," Econometric Society World Congress 2000 Contributed Papers 0973, Econometric Society.
  8. 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.
  9. Boone, J. & Bovenberg, A.L., 2000. "Optimal Labour Taxation and Search," Discussion Paper 2000-17, Tilburg University, Center for Economic Research.
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  17. Rosen, Sherwin, 1985. "Implicit Contracts: A Survey," Journal of Economic Literature, American Economic Association, vol. 23(3), pages 1144-75, September.
  18. Holmlund, Bertil, 1997. "Unemployment Insurance in Theory and Practice," Working Paper Series 1997:25, Uppsala University, Department of Economics.
  19. 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.
  20. Boone, J. & de Mooij, R.A., 2000. "Tax Policy in a Model of Search with Training," Discussion Paper 2000-07, Tilburg University, Center for Economic Research.
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  24. 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.
  25. 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.
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