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Optimal Unemployment Insurance with Monitoring

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  • Setty, Ofer

Abstract

Monitoring the job-search activities of unemployed workers is a common gov- ernment intervention. I model monitoring in the optimal unemployment insurance framework of Hopenhayn and Nicolini (1997), where job-search e¤ort is private in- formation for the unemployed worker. In the model, monitoring provides costly imperfect information upon which the government conditions the unemployment bene ts. In the optimal monitoring scheme, random monitoring, together with endogenous sanctions and rewards, create e¤ective job-search incentives for the un- employed worker. For CRRA utility, the monitoring frequency increases and the spreads decrease with promised utility, if and only if the coe¢ cient of risk aver- sion is greater than 1 2 . Compared to optimal unemployment insurance, monitoring saves, at the balanced budget point, about eighty percent of the cost associated with moral hazard. The gain is achieved by a decrease of more than half in the standard deviation of consumption.

Suggested Citation

  • Setty, Ofer, 2012. "Optimal Unemployment Insurance with Monitoring," Foerder Institute for Economic Research Working Papers 275766, Tel-Aviv University > Foerder Institute for Economic Research.
  • Handle: RePEc:ags:isfiwp:275766
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    References listed on IDEAS

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    Cited by:

    1. Setty, Ofer, 2012. "Unemployment Accounts," Foerder Institute for Economic Research Working Papers 275765, Tel-Aviv University > Foerder Institute for Economic Research.
    2. Ofer Setty: Tel Aviv University, 2011. "Unemployment Accounts," 2011 Meeting Papers 204, Society for Economic Dynamics.
    3. Pavoni, Nicola & Setty, Ofer & Violante, Giovanni L, 2013. "Search and Work in Optimal Welfare Programs," CEPR Discussion Papers 9389, C.E.P.R. Discussion Papers.

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    Keywords

    Financial Economics; Public Economics;

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