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Optimal Unemployment Insurance with Endogenous Search Effort

  • Ping Yan

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

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    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%.

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    Article provided by Society for AEF in its journal Annals of Economics and Finance.

    Volume (Year): 12 (2011)
    Issue (Month): 2 (November)
    Pages: 347-369

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    Handle: RePEc:cuf:journl:y:2011:v:12:i:2:p:347-369
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    1. 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.
    2. Daron Acemoglu & Robert Shimer, 1999. "Productivity Gains from Unemployment Insurance," NBER Working Papers 7352, National Bureau of Economic Research, Inc.
    3. 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.
    4. Eran Yashiv, 2000. "The Determinants of Equilibrium Unemployment," American Economic Review, American Economic Association, vol. 90(5), pages 1297-1322, December.
    5. Coen N. Teulings & Pieter A. Gautier, 2004. "The Right Man for the Job," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 553-580.
    6. Oliver Jean Blanchard & Peter Diamond, 1989. "The Beveridge Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1), pages 1-76.
    7. Edi Karni, 1999. "Optimal Unemployment Insurance: A Survey," Southern Economic Journal, Southern Economic Association, vol. 66(2), pages 442-465, October.
    8. Chun Chang & Yijiang Wang, 2000. "Choosing between Up-or-Out and Spot Contracts: Human Capital Investment versus Job-Matching Considerations," Annals of Economics and Finance, Society for AEF, vol. 1(1), pages 189-210, May.
    9. Haoming Liu & Yi Wen & Lijing Zhu, 2007. "Uniform Working Hours and Structural Unemployment," Annals of Economics and Finance, Society for AEF, vol. 8(1), pages 113-136, May.
    10. Richard E. Kihlstrom & Jean-Jacques Laffont, 2002. "General Equilibrium in a Labor-Managed Economy with Uncertainty and Incomplete Markets," Annals of Economics and Finance, Society for AEF, vol. 3(1), pages 185-217, May.
    11. W. Henry Chiu & Edi Karni, 1998. "Endogenous Adverse Selection and Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 106(4), pages 806-827, August.
    12. Bruce D. Meyer, 1989. "A Quasi-Experimental Approach to the Effects of Unemployment Insurance," NBER Working Papers 3159, National Bureau of Economic Research, Inc.
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