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Optimal Unemployment Insurance: Transitional Dynamics vs. Steady State

Author

Listed:
  • Gilles Joseph

    (Universite Catholique de Louvain)

  • Thomas Weitzenblum

    (Universite Paris-Dauphine and CEPREMAP)

Abstract

In this study, we ask whether the presence of precautionary savings substantially reduces the optimal replacement rate in an European economy type characterized by high unemployment benefits and moral hazard. We build a simple job search model calibrated on French data and, in line with previous studies, find that the optimality criterion based on comparisons of steady states leads to a low optimal ratio. Yet, this result ignores potential transitional costs due to the necessity for agents to increase their savings and reduce their consumption whenever the ratio is cut. We therefore build a dynamic model taking full account of the transition, and show that a reduction in benefits reduces welfare. Even though the long-run optimal replacement rate is lower than the current one, transitional costs dominate long-run gains. (Copyright: Elsevier)

Suggested Citation

  • Gilles Joseph & Thomas Weitzenblum, 2003. "Optimal Unemployment Insurance: Transitional Dynamics vs. Steady State," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 869-884, October.
  • Handle: RePEc:red:issued:v:6:y:2003:i:4:p:869-884 DOI: 10.1016/S1094-2025(03)00021-8
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Takashi Kamihigashi & John Stachurski, 2011. "Existence, Stability and Computation of Stationary Distributions: An Extension of the Hopenhayn-Prescott Theorem," Discussion Paper Series DP2011-32, Research Institute for Economics & Business Administration, Kobe University.
    2. Flórez, Luz A., 2017. "Informal sector under saving: A positive analysis of labour market policies," Labour Economics, Elsevier, vol. 44(C), pages 13-26.
    3. Williamson, Stephen D. & Wang, Cheng, 1999. "Moral Hazard, Optimal Unemployment Insurance, and Experience Rating," Working Papers 99-03, University of Iowa, Department of Economics.
    4. Hagedorn, Marcus & Kaul, Ashok & Mennel, Tim, 2010. "An adverse selection model of optimal unemployment insurance," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 490-502, March.
    5. Takashi Kamihigashi & John Stachurski, 2011. "Stability of Stationary Distributions in Monotone Economies," ANU Working Papers in Economics and Econometrics 2011-561, Australian National University, College of Business and Economics, School of Economics.
    6. Luz Adriana Flórez, 2014. "Optimal Policy with Informal Sector and Endogenous Savings," Borradores de Economia 833, Banco de la Republica de Colombia.
    7. Kankanamge, Sumudu & Weitzenblum, Thomas, 2016. "Time-consistent unemployment insurance," TSE Working Papers 16-657, Toulouse School of Economics (TSE).
    8. Mukoyama, Toshihiko, 2013. "Understanding the welfare effects of unemployment insurance policy in general equilibrium," Journal of Macroeconomics, Elsevier, pages 347-368.
    9. Wang, Cheng & Williamson, Stephen D., 2002. "Moral hazard, optimal unemployment insurance, and experience rating," Journal of Monetary Economics, Elsevier, pages 1337-1371.
    10. Wolf-Heimo Grieben, 2005. "Schumpeterian growth and the political economy of employment protection," Journal of Economics, Springer, pages 77-118.
    11. Stachurski, John & Kamihigashi, Takashi, 2014. "Stochastic stability in monotone economies," Theoretical Economics, Econometric Society, vol. 9(2), May.
    12. Takashi Kamihigashi & John Stachurski, 2012. "Exact Draws from the Stationary Distribution of Entry-Exit Models," ANU Working Papers in Economics and Econometrics 2012-588, Australian National University, College of Business and Economics, School of Economics.
    13. Wolf-Heimo Grieben, 2005. "Schumpeterian growth and the political economy of employment protection," Journal of Economics, Springer, pages 77-118.

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