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Unemployment Insurance and Incentives


  • Knut K. Aase


In this paper we present a partial economic equilibrium model of the labor market in which we maximize the workers' expected discounted utility level, while implying a zero expected profit for the firms.The model we use for the labor market takes into consideration transitions between the various states of employment and the time periods spent in each state. The probability distribution of these time periods may be arbitrary, not restricted to being exponential, as is the case for ordinary time-continuous Markov processes.The basic principles and difficulties arising from monitoring problems and moral hazard are discussed. In order to analyze unemployment insurance schemes that include incentives for workers to avoid unemployment, we depart from the simplest form of the principle of equivalence in insurance. Several different alternatives are discussed, all giving rise to partial insurance and thus incentives.We also analyze the effects that early retirement have on unemployment. Here, we include social security benefits in the economic model.Finally, we show that the optimal solutions entail quantity rationing. The Geneva Papers on Risk and Insurance Theory (1990) 15, 141–157. doi:10.1007/BF01489706

Suggested Citation

  • Knut K. Aase, 1990. "Unemployment Insurance and Incentives," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 15(2), pages 141-157, September.
  • Handle: RePEc:pal:genrir:v:15:y:1990:i:2:p:141-157

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    Cited by:

    1. Andrey Launov & Klaus Wälde, 2013. "Estimating Incentive And Welfare Effects Of Nonstationary Unemployment Benefits," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54, pages 1159-1198, November.
    2. Gourieroux, C. & Scaillet, O., 1997. "Unemployment insurance and mortgages," Insurance: Mathematics and Economics, Elsevier, vol. 20(3), pages 173-195, October.

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