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Optimal Unemployment Insurance with Endogenous Search Effort

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  • Ping Yan

    (National School of Development, China Center for Economic Research, Peking University)

Abstract

In the framework of a search and matching model, when search effort enters the labor market matching function, search effort by one worker generates a negative externality on other workers searching for jobs. The solution to the social planner's problem may not be decentralized in a competitive market. Calibration shows that the current US unemployment insurance (UI) system generates an 8.07% welfare loss relative to the socially optimal allocation. An alternative scheme with higher replacement rate and lower wage, which achieves the highest welfare level among all competitive equilibria with unemployment insurance, leads to a welfare loss of only 1.18%.

Suggested Citation

  • Ping Yan, 2011. "Optimal Unemployment Insurance with Endogenous Search Effort," Annals of Economics and Finance, Society for AEF, vol. 12(2), pages 347-369, November.
    • Handle: RePEc:cuf:journl:y:2011:v:12:i:2:p:347-369
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    References listed on IDEAS

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    Cited by:

    1. Ping Yan, 2013. "How much do Workers Search?," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 249-277, May.

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    Keywords

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    JEL classification:

    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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