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Unemployment insurance with moral hazard in a dynamic economy

Listed author(s):
  • Wang, Cheng
  • Williamson, Stephen

We study a dynamic model with positive gross flows between employment and unemployment. There is moral hazard associated with search effort and job-retention effort. A quantitative comparison of the unemployment insurance system currently in place in the United States with an optimal system shows that the optimal system reduces the steady state unemployment rate by 3.40 percentage points and increases output by 3.64\%. The optimal system involves a large subsidy for a transition from unemployment to employment and a large penalty for a transition from employment to unemployment.

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Article provided by Elsevier in its journal Carnegie-Rochester Conference Series on Public Policy.

Volume (Year): 44 (1996)
Issue (Month): 1 (June)
Pages: 1-41

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Handle: RePEc:eee:crcspp:v:44:y:1996:i::p:1-41
Contact details of provider: Web page: http://www.elsevier.com/locate/jme

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  1. Phelan, C. & Townsend, R.M., 1990. "Computing Multiperiod, Information-Constrained Optima," University of Chicago - Economics Research Center 90-13, Chicago - Economics Research Center.
  2. Albrecht, James W & Axell, Bo, 1984. "An Equilibrium Model of Search Unemployment," Journal of Political Economy, University of Chicago Press, vol. 92(5), pages 824-840, October.
  3. Christopher Phelan & Robert M. Townsend, 1991. "Computing Multi-Period, Information-Constrained Optima," Review of Economic Studies, Oxford University Press, vol. 58(5), pages 853-881.
  4. Stephen E. Spear & Sanjay Srivastava, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Oxford University Press, vol. 54(4), pages 599-617.
  5. Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 53(6), pages 1357-1367, November.
  6. Davidson, Carl & Woodbury, Stephen A., 1997. "Optimal unemployment insurance," Journal of Public Economics, Elsevier, vol. 64(3), pages 359-387, June.
  7. 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 1347-1362, December.
  8. Dale T. Mortensen, 1977. "Unemployment Insurance and Job Search Decisions," ILR Review, Cornell University, ILR School, vol. 30(4), pages 505-517, July.
  9. Abowd, John M & Zellner, Arnold, 1985. "Estimating Gross Labor-Force Flows," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(3), pages 254-283, June.
  10. Hansen, Gary D & Imrohoroglu, Ayse, 1992. "The Role of Unemployment Insurance in an Economy with Liquidity Constraints and Moral Hazard," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 118-142, February.
  11. Christopher Phelan, 1994. "Incentives and Aggregate Shocks," Review of Economic Studies, Oxford University Press, vol. 61(4), pages 681-700.
  12. Cheng Wang, 1995. "Dynamic Insurance with Private Information and Balanced Budgets," Review of Economic Studies, Oxford University Press, vol. 62(4), pages 577-595.
  13. Andrew Atkeson & Robert E. Lucas, 1992. "On Efficient Distribution With Private Information," Review of Economic Studies, Oxford University Press, vol. 59(3), pages 427-453.
  14. Topel, Robert H, 1984. "Experience Rating of Unemployment Insurance and the Incidence of Unemployment," Journal of Law and Economics, University of Chicago Press, vol. 27(1), pages 61-90, April.
  15. Oliver Jean Blanchard & Peter Diamond, 1990. "The Cyclical Behovior of the Gross Flows of U.S. Workers," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(2), pages 85-156.
  16. Narayana Kocherlakota, 1993. "Efficient Bilateral Risk Sharing Without Commitment," Macroeconomics 9311001, EconWPA.
  17. Hopenhayn, Hugo A & Nicolini, Juan Pablo, 1997. "Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 412-438, April.
  18. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
  19. Bart Taub, 1990. "The Equivalence of Lending Equilibria and Signalling-Based Insurance under Asymmetric Information," RAND Journal of Economics, The RAND Corporation, vol. 21(3), pages 388-408, Autumn.
  20. Mortensen, Dale T., 1983. "A welfare analysis of unemployment insurance: Variations on second-best themes," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 19(1), pages 67-97, January.
  21. Andrew Atkeson & Robert E. Lucas, Jr., 1993. "Effciency and Equality in a Simple Model of Unemployment Insurance," NBER Working Papers 4381, National Bureau of Economic Research, Inc.
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