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On the Optimality of Search Matching Equilibrium when workers are risk adverse

  • LEHMANN E.
  • VAN DER LINDEN B.

This papers revisits the normative properties of search-matching economies when workers have concave utility functions. A general equilibrium framework is developed where agents are homogeneous and wages are bargained over. Assuming lump-sum taxation of profits, the optimal allocation of resources is characterized first when information is perfect and second when unemployed people freely choose their search effort. Compared to the first case, the optimum is characterized by imperfect unemployment insurance and lower levels of search intensity and output in the second setting. To decenralize these optima, employees should be unable to extract a rent when information is perfect. An appropriate positive rent is however needed in the second case. When the bargaining power of the workers is given, these outcomes can be implemented through a well-designed non-linear tax schedule and an appropriate level of unemployment benefits. According to the level of the bargaining power, taxation can be progressive or regressive. Negative marginal tax rates are even needed for sufficiently low levels of the bargaining power.

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Paper provided by ERMES, University Paris 2 in its series Working Papers ERMES with number 0406.

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Date of creation: 2004
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Handle: RePEc:erm:papers:0406
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  4. Boone, Jan & Bovenberg, A Lans, 2002. "The Optimal Taxation of Unskilled Labour with Job Search and Social Assistance," CEPR Discussion Papers 3446, C.E.P.R. Discussion Papers.
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  10. Boone, J. & de Mooij, R.A., 2000. "Tax Policy in a Model of Search with Training," Discussion Paper 2000-07, Tilburg University, Center for Economic Research.
  11. Christopher A. Pissarides, 1997. "The Impact of Employment Tax Cuts on Unemployment and Wages: The Role of Unemployment Benefits and Tax Structure," CEP Discussion Papers dp0361, Centre for Economic Performance, LSE.
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  13. Mathias, HUNGERBUELHER & Etienne, LEHMANN & Alexis PARMENTIER & Bruno VAN DER LINDEN, 2003. "Optimal Income Taxation in an Equilibrium Unemployment Model : Mirrlees meets Pissarides," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2003024, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  14. Fredriksson, Peter & Holmlund, Bertil, 1998. "Optimal Unemployment Insurance in Search Equilibrium," Working Paper Series 1998:2, Uppsala University, Department of Economics.
  15. 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 1347-62, December.
  16. Barbara Petrongolo & Christopher A. Pissarides, 2000. "Looking Into the Black Box: A Survey of the Matching Function," CEP Discussion Papers dp0470, Centre for Economic Performance, LSE.
  17. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
  18. Cahuc, Pierre & Lehmann, Etienne, 2000. "Should unemployment benefits decrease with the unemployment spell?," Journal of Public Economics, Elsevier, vol. 77(1), pages 135-153, July.
  19. Holmlund, Bertil, 1997. "Unemployment Insurance in Theory and Practice," Working Paper Series 1997:25, Uppsala University, Department of Economics.
  20. Arthur J. Hosios, 1990. "On The Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Oxford University Press, vol. 57(2), pages 279-298.
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  22. Lockwood, Ben & Manning, Alan, 1993. "Wage setting and the tax system theory and evidence for the United Kingdom," Journal of Public Economics, Elsevier, vol. 52(1), pages 1-29, August.
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