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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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  1. Jan Boone & Ruud de Mooij, 2000. "Tax policy in a model of search with training," CPB Research Memorandum 161, CPB Netherlands Bureau for Economic Policy Analysis.
  2. Boone, Jan & Bovenberg, Lans, 2004. "The optimal taxation of unskilled labor with job search and social assistance," Journal of Public Economics, Elsevier, vol. 88(11), pages 2227-2258, September.
  3. Boone, Jan & van Ours, Jan C, 2000. "Modelling Financial Incentives To Get Unemployed Back To Work," CEPR Discussion Papers 2361, C.E.P.R. Discussion Papers.
  4. Boone, Jan & Bovenberg, A Lans, 2001. "Optimal Labour Taxation and Search," CEPR Discussion Papers 3002, C.E.P.R. Discussion Papers.
  5. Holmlund, B. & Kolm, A.S., 1995. "Progressive Taxation, Wage Setting and Unemployment - Theory and Swedish Evidence," Papers 15, Uppsala - Working Paper Series.
  6. Christopher A. Pissarides & Barbara Petrongolo, 2001. "Looking into the Black Box: A Survey of the Matching Function," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 390-431, June.
  7. 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.
  8. Boone, Jan & Fredriksson, Peter & Holmlund, Bertil & van Ours, Jan C, 2001. "Optimal Unemployment Insurance with Monitoring and Sanctions," CEPR Discussion Papers 3082, C.E.P.R. Discussion Papers.
  9. Hopenhayn, H. & Nicolini, P.J., 1996. "Optimal Unemployment Insurance," RCER Working Papers 421, University of Rochester - Center for Economic Research (RCER).
  10. Fuest, Clemens & Huber, Bernd, 2000. "Is tax progression really good for employment? A model with endogenous hours of work," Munich Reprints in Economics 20296, University of Munich, Department of Economics.
  11. Alan Manning, 2001. "Monopsony and the Efficiency of Labour Market Interventions," CEP Discussion Papers dp0514, Centre for Economic Performance, LSE.
  12. Holmlund, B., 1997. "Unemployment Insurance in Theory and Practice," Papers 1997-25, Uppsala - Working Paper Series.
  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. Pissarides, Christopher A., 1998. "The impact of employment tax cuts on unemployment and wages; The role of unemployment benefits and tax structure," European Economic Review, Elsevier, vol. 42(1), pages 155-183, January.
  15. Sherwin Rosen, 1985. "Implicit Contracts: A Survey," NBER Working Papers 1635, National Bureau of Economic Research, Inc.
  16. Fredriksson, Peter & Holmlund, Bertil, 1998. "Optimal Unemployment Insurance in Search Equilibrium," Working Paper Series 1998:2, Uppsala University, Department of Economics.
  17. Emmanuel Saez, 2000. "Optimal Income Transfer Programs: Intensive Versus Extensive Labor Supply Responses," NBER Working Papers 7708, National Bureau of Economic Research, Inc.
  18. 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.
  19. 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.
  20. Robin Boadway & Katherine Cuff, 1999. "Monitoring Job Search as an Instrument for Targeting Transfers," Cahiers de recherche CREFE / CREFE Working Papers 71, CREFE, Université du Québec à Montréal.
  21. Sorensen, Peter Birch, 1999. "Optimal tax progressivity in imperfect labour markets," Labour Economics, Elsevier, vol. 6(3), pages 435-452, September.
  22. 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.
  23. 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.
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