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Moral Hazard and Optimal Unemployment Insurance in an Economy with Heterogeneous Skills

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Abstract

In this paper, we show that in a dynamic general equilibrium economy, the presence of moral hazard need not induce large cuts in optimal unemployment insurance benefits. We find that it takes a quite large proportion of "shirkers" to bend the generosity of the optimal unemployment insurance program. This result stands in sharp contrast to the extant literature. Our key assumption is that agents are heterogeneous in skills and may differ in their wage as well as in their transition in and out of unemployment. Our results have important implications in the light of recent unemployment insurance reforms. Dans cette étude, nous montrons que le risque moral joue un maigre rôle dans la détermination de l'assurance chômage optimale. Dans une économie d'équilibre général dynamique, nous trouvons que seule la présence d'un nombre très important d'abuseurs conduit à une perte significative de générosité dans les allocations d'assurance chômage. Ce résultat va à l'encontre de la littérature existante. Notre modèle s'en distingue uniquement par le fait que les agents diffèrent dans leurs habiletés, ce qui se traduit par des différences de salaires et de probabilités de chômage. Ces résultats peuvent avoir des conséquences importantes au vu des réformes récentes de l'assurance chômage.

Suggested Citation

  • Stephane Pallage & Christian Zimmermann, 1997. "Moral Hazard and Optimal Unemployment Insurance in an Economy with Heterogeneous Skills," Cahiers de recherche CREFE / CREFE Working Papers 54, CREFE, Université du Québec à Montréal.
  • Handle: RePEc:cre:crefwp:54
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    References listed on IDEAS

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    1. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
    2. Wang, Cheng & Williamson, Stephen, 1996. "Unemployment insurance with moral hazard in a dynamic economy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 44(1), pages 1-41, June.
    3. Greenwood, Jeremy & Huffman, Gregory W., 1987. "A dynamic equilibrium model of inflation and unemployment," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 203-228, March.
    4. Daron Acemoglu & Robert Shimer, 1999. "Efficient Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 893-928, October.
    5. Shavell, Steven & Weiss, Laurence, 1979. "The Optimal Payment of Unemployment Insurance Benefits over Time," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1347-1362, December.
    6. Gomes, Joao & Greenwood, Jeremy & Rebelo, Sergio, 2001. "Equilibrium unemployment," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 109-152, August.
    7. Hansen, Gary D & Imrohoroglu, Ayse, 1992. "The Role of Unemployment Insurance in an Economy with Liquidity Constraints and Moral Hazard," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 118-142, February.
    8. Andelfatto, D. & Gomme, P., 1995. "Unemployment Insurance, Labor Market Dynamics, and Social Welfare," Working Papers 9502, University of Waterloo, Department of Economics.
    9. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
    10. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January.
    11. Rogerson, Richard & Wright, Randall, 1988. "Involuntary unemployment in economies with efficient risk sharing," Journal of Monetary Economics, Elsevier, vol. 22(3), pages 501-515.
    12. Wright, Randall, 1986. "The redistributive roles of unemployment insurance and the dynamics of voting," Journal of Public Economics, Elsevier, vol. 31(3), pages 377-399, December.
    13. Jonathan Gruber, 1994. "The Consumption Smoothing Benefits of Unemployment Insurance," NBER Working Papers 4750, National Bureau of Economic Research, Inc.
    14. Hopenhayn, Hugo A & Nicolini, Juan Pablo, 1997. "Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 412-438, April.
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    Cited by:

    1. World Bank, 2001. "Poverty and Income Distribution in a High Growth Economy : The Case of Chile 1987-98, Volume 2. Background Papers," World Bank Other Operational Studies 15469, The World Bank.
    2. Natalya Y. Shelkova, 2009. "The Minimum Wage Spike in the Search Economy with Wage-Posting," Working papers 2009-40, University of Connecticut, Department of Economics.
    3. Wang, Cheng & Williamson, Stephen D., 2002. "Moral hazard, optimal unemployment insurance, and experience rating," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1337-1371, October.
    4. Castro-Fernandez, Rodriguo & Wodon, Quentin, 2002. "Protecting the Unemployed in Chile: From State Assistance to Individual Insurance?," MPRA Paper 15416, University Library of Munich, Germany.
    5. World Bank, 2002. "Chile's High Growth Economy : Poverty and Income Distribution, 1987-1998," World Bank Publications, The World Bank, number 14091.

    More about this item

    Keywords

    Unemployment Insurance; Moral Hazard; Redistribution; Dynamic General Equilibrium; Heterogeneous Agents; Voting;

    JEL classification:

    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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