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Unemployment Insurance and Optimal Taxation in a Search Model of the Labor Market

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  • Athanasios Geromichalos

    (University of California Davis)

Abstract

In many search models of the labor market, unemployment insurance (UI) is conveniently interpreted as the value of leisure or home production and is, therefore, treated as a parameter. However, in reality, UI has to be funded through taxation that might be distortionary. In this paper, I analyze the welfare implications of raising funds towards UI benefits through different taxation systems within a directed search model. Since firms "direct" workers to apply to them by posting wages, raising UI funds in a lump-sum manner always distorts the efficient allocation, as it gives firms an incentive to be excessively aggressive in their attempt to maximize the probability of filling up their vacancies. I discuss two ways through which this externality can be internalized and efficiency can be restored. (Copyright: Elsevier)

Suggested Citation

  • Athanasios Geromichalos, 2015. "Unemployment Insurance and Optimal Taxation in a Search Model of the Labor Market," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(2), pages 365-380, April.
  • Handle: RePEc:red:issued:12-210
    DOI: 10.1016/j.red.2014.07.002
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    References listed on IDEAS

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    1. Athanasios Geromichalos, 2012. "Directed Search and the Bertrand Paradox," Working Papers 1221, University of California, Davis, Department of Economics.
    2. Serene Tan, 2012. "Directed Search And Firm Size," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(1), pages 95-113, February.
    3. Galenianos, Manolis & Kircher, Philipp, 2009. "Directed search with multiple job applications," Journal of Economic Theory, Elsevier, vol. 144(2), pages 445-471, March.
    4. Robert Shimer & Ivan Werning, 2008. "Liquidity and Insurance for the Unemployed," American Economic Review, American Economic Association, vol. 98(5), pages 1922-1942, December.
    5. James Albrecht & Pieter A. Gautier & Susan Vroman, 2006. "Equilibrium Directed Search with Multiple Applications," Review of Economic Studies, Oxford University Press, vol. 73(4), pages 869-891.
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    Citations

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    Cited by:

    1. Jian Xin Heng & Benoit Julien & John Kennes & Ian King, 2016. "Job Qualities, Search Unemployment, and Public Policy," Discussion Papers Series 570, School of Economics, University of Queensland, Australia.
    2. Guerrieri, Veronica & Julien, Benoit & Kircher, Philipp & Wright, Randall, 2017. "Directed Search: A Guided Tour," CEPR Discussion Papers 12315, C.E.P.R. Discussion Papers.
    3. repec:eee:dyncon:v:90:y:2018:i:c:p:236-258 is not listed on IDEAS

    More about this item

    Keywords

    Directed search; Unemployment insurance; Optimal taxation;

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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