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Risk Aversion, Uncertainty, Unemployment Insurance Benefit and Duration of "Wait" Unemployment

Author

Listed:
  • Tan Wang

    (Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University)

  • Tony S. Wirjanto

    (School of Accounting & Finance and Department of Statistics & Actuarial Science, University of Waterloo)

Abstract

Building on the tools developed for American call options in financial markets in Finance and the optimal timing of investment under uncertainty in Economics, this paper proposes a stylized equilibrium model to study the optimal time for a risk-averse unemployed individual, who receives an unemployment insurance benefit and may receive a recall from the old job, to exit from a waiting (and hence unemployment) state and start a new job. It is shown that as a result of the unemployed individual's exercising her optimal timing strategy, there is duration of so-called waiting and that this duration is affected by a number of economic primitives, prominent among which are the attitude of an unemployed individual toward risk and the uncertainty faced by this individual.

Suggested Citation

  • Tan Wang & Tony S. Wirjanto, 2016. "Risk Aversion, Uncertainty, Unemployment Insurance Benefit and Duration of "Wait" Unemployment," Annals of Economics and Finance, Society for AEF, vol. 17(1), pages 1-34, May.
    • Handle: RePEc:cuf:journl:y:2016:v:17:i:1:wang
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    References listed on IDEAS

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    Cited by:

    1. Jason S. Anquandah & Leonid V. Bogachev, 2019. "Optimal Stopping and Utility in a Simple Modelof Unemployment Insurance," Risks, MDPI, vol. 7(3), pages 1-41, September.
    2. Jason S. Anquandah & Leonid V. Bogachev, 2019. "Optimal Stopping and Utility in a Simple Model of Unemployment Insurance," Papers 1902.06175, arXiv.org, revised Sep 2019.

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    More about this item

    Keywords

    Unemployment insurance; Income; Utility function; Brownian motions; Search; Waiting; Exit; Continuation region;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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