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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
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Publication status: Published in Darmstadt Discussion Papers in Economics . 191 (2008-03)
Handle: RePEc:dar:ddpeco:35490
Note: for complete metadata visit http://tubiblio.ulb.tu-darmstadt.de/35490/
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  1. Lalive, Rafael & van Ours, Jan C. & Zweimüller, Josef, 2004. "How Changes in Financial Incentives Affect the Duration of Unemployment," IZA Discussion Papers 1363, Institute for the Study of Labor (IZA).
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  13. Daron Acemoglu & Robert Shimer, 1999. "Productivity Gains from Unemployment Insurance," Working papers 99-29, Massachusetts Institute of Technology (MIT), Department of Economics.
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  24. Demougin, Dominique & Fluet, Claude, 2001. "Monitoring versus incentives," European Economic Review, Elsevier, vol. 45(9), pages 1741-1764, October.
  25. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
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  32. Dominique Demougin & Carsten Helm, 2006. "Moral Hazard and Bargaining Power," German Economic Review, Verein für Socialpolitik, vol. 7, pages 463-470, November.
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