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Equilibrium Unemployment Insurance

  • Hassler, John
  • Rodríguez Mora, José Vicente
  • Storesletten, Kjetil
  • Zilibotti, Fabrizio

In this paper, we incorporate a positive theory of unemployment insurance into a dynamic overlapping generations model with search-matching frictions and on-the-job learning-by-doing. The model shows that societies populated by identical rational agents, but differing in the initial distribution of human capital across agents, may choose very different unemployment insurance levels in a politico-economic equilibrium. The interaction between the political decision about the level of the unemployment insurance and the optimal search behavior of the unemployed gives rise to a self-reinforcing mechanism which may generate multiple steady-state equilibria. In particular, a European-type steady-state with high unemployment, low employment turnover and high insurance can co-exist with an American-type steady-state with low unemployment, high employment turnover and low unemployment insurance. A calibrated version of the model features two distinct steady-state equilibria with unemployment levels and duration rates resembling those of the U.S. and Europe, respectively.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2126.

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Date of creation: Apr 1999
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Handle: RePEc:cpr:ceprdp:2126
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