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Efficient Unemployment Insurance

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  • Daron Acemoglu
  • Robert Shimer

Abstract

This paper constructs a tractable general equilibrium model of search with risk-aversion. An increase in risk-aversion reduces wages, unemployment, and investment. Unemployment insurance (UI) has the reverse effect due to market generated moral hazard: insured workers seek high wage jobs with high unemployment risk. An economy with risk-neutral workers achieves maximal output without any UI. In contrast, in an economy with risk-averse workers, a positive level of UI maximizes output. Therefore, moderate UI not only improves risk-sharing, but also increases output.
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  • Daron Acemoglu & Robert Shimer, 1999. "Efficient Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 893-928, October.
    • Handle: RePEc:ucp:jpolec:v:107:y:1999:i:5:p:893-928
    DOI: 10.1086/250084
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    More about this item

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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