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Incentive Contracts and Efficient Unemployment Benefits

  • Demougin, Dominique
  • Helm, Carsten

Several European countries have reformed their labor market institutions. Incentive effects of unemployment benefits have been an important aspect of these reforms. We analyze this issue in a principal-agent model, focusing on unemployment levels and labor productivity. In our model, a higher level of unemployment benefits improves the worker's position in wage bargaining, leading to stronger effort incentives and higher output. However, it also reduces incentives for labor market participation. Accordingly, there is a trade-off. We analyze how changes in the economic environment such as globalization and better educated workers affect this trade-off.

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Paper provided by Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute of Economics (VWL) in its series Darmstadt Discussion Papers in Economics with number 35490.

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Date of creation: Mar 2008
Date of revision:
Publication status: Published in Darmstadt Discussion Papers in Economics . 191 (2008-03)
Handle: RePEc:dar:ddpeco:35490
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