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Optimal Unemployment Insurance: How Important is the Demand Side?

  • Rune Vejlin

    ()

    (Department of Economics and Business, Aarhus University, Denmark)

I develop and simulate an equilibrium model of search with endogenous savings and search intensity. The wage offer distribution is endogenized by firms making vacancy and entry choices. This allows me to conduct a counterfactual analysis of the optimal unemployment insurance (UI) level. The provision of UI is motivated by the worker's inability to perfectly insure against income shocks, but at the same time UI introduces a distortion to the level of search intensity of the worker and vacancy intensity of firms. I find that equilibrium effects are important to take into account. Making policy from a partial model can introduce large welfare loses. It is also shown that different kinds of taxes have different implications on welfare.

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File URL: ftp://ftp.econ.au.dk/afn/wp/11/wp11_03.pdf
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Paper provided by School of Economics and Management, University of Aarhus in its series Economics Working Papers with number 2011-03.

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Length: 54
Date of creation: 11 Mar 2011
Date of revision:
Handle: RePEc:aah:aarhec:2011-03
Contact details of provider: Web page: http://www.econ.au.dk/afn/

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  1. Raj Chetty, 2008. "Moral Hazard vs. Liquidity and Optimal Unemployment Insurance," NBER Working Papers 13967, National Bureau of Economic Research, Inc.
  2. Yann Algan & Arnaud Cheron & Jean-Olivier Hairault & Francois Langot, 2003. "Wealth Effect on Labor Market Transitions," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(1), pages 156-178, January.
  3. Hopenhayn, H. & Nicolini, P.J., 1996. "Optimal Unemployment Insurance," RCER Working Papers 421, University of Rochester - Center for Economic Research (RCER).
  4. Shaked, Avner & Sutton, John, 1984. "Involuntary Unemployment as a Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 52(6), pages 1351-64, November.
  5. Silvio Rendon, 2002. "Job search and asset accumulation under borrowing constraints," Economics Working Papers 649, Department of Economics and Business, Universitat Pompeu Fabra.
  6. Rasmus Lentz & Torben Tranas, 2005. "Job Search and Savings: Wealth Effects and Duration Dependence," Journal of Labor Economics, University of Chicago Press, vol. 23(3), pages 467-490, July.
  7. Conley, John P. & Wilkie, Simon, 1996. "An Extension of the Nash Bargaining Solution to Nonconvex Problems," Games and Economic Behavior, Elsevier, vol. 13(1), pages 26-38, March.
  8. Bent Jesper Christensen & Rasmus Lentz & Dale T. Mortensen & George R. Neumann & Axel Werwatz, 2005. "On-the-Job Search and the Wage Distribution," Journal of Labor Economics, University of Chicago Press, vol. 23(1), pages 31-58, January.
  9. Fredriksson, P. & Holmlund, B., 1998. "Optimal Unemployment Insurance in Search Equilibrium," Papers 1998-2, Uppsala - Working Paper Series.
  10. Rasmus Lentz, 2009. "Optimal Unemployment Insurance in an Estimated Job Search Model with Savings," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(1), pages 37-57, January.
  11. Jeremy Lise, 2006. "On-the-Job Search and Precautionary Savings: Theory and Empirics of Earnings and Wealth Inequality," 2006 Meeting Papers 137, Society for Economic Dynamics.
  12. Sennewald, Ken, 2007. "Controlled stochastic differential equations under Poisson uncertainty and with unbounded utility," Journal of Economic Dynamics and Control, Elsevier, vol. 31(4), pages 1106-1131, April.
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