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Unemployment Insurance under Moral Hazard and Limited Commitment: Public vs Private Provision

  • Jonathan P Thomas


    (Department of Economics, University of St. Andrews,)

  • Tim Worrall


    (Department of Economics Keele University)

This paper analyses a model of private unemployment insurance under limited commitment and a model of public unemployment insurance subject to moral hazard in an economy with a continuum of agents and an infinite time horizon. The dynamic and steady-state properties of the private unemployment insurance scheme are established. The interaction between the public and private unemployment insurance schemes is examined. Examples are constructed to show that for some parameter values increased public insurance can reduce welfare by crowding out private insurance more than one-to-one and that for other parameter values a mix of both public and private insurance can be welfare maximising.

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Paper provided by Centre for Economic Research, Keele University in its series Keele Economics Research Papers with number KERP 2002/20.

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Length: 35 pages
Date of creation: Oct 2002
Date of revision:
Handle: RePEc:kee:kerpuk:2002/20
Note: Originally titled ‘‘Social Insurance and Crowding Out’’.
Contact details of provider: Postal: Department of Economics, University of Keele, Keele, Staffordshire, ST5 5BG - United Kingdom
Phone: +44 (0)1782 584581
Fax: +44 (0)1782 717577
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Order Information: Postal: Centre for Economic Research, Research Institute for Public Policy and Management, Keele University, Staffordshire ST5 5BG - United Kingdom
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  1. Hanno Lustig, 2001. "The Market Price of Aggregate Risk and the Wealth Distribution," Finance 0111004, EconWPA, revised 16 Nov 2001.
  2. Ethan Ligon & Jonathan P. Thomas & Tim Worrall, 2000. "Mutual Insurance, Individual Savings and Limited Commitment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(2), pages 216-246, April.
  3. Rafael Di Tella & Robert MacCulloch, 2002. "Informal Family Insurance And The Design Of The Welfare State," Economic Journal, Royal Economic Society, vol. 112(481), pages 481-503, July.
  4. Attanasio, Orazio & Rios-Rull, Jose-Victor, 2000. "Consumption smoothing in island economies: Can public insurance reduce welfare?," European Economic Review, Elsevier, vol. 44(7), pages 1225-1258, June.
  5. Dirk Krueger & Fabrizio Perri, 1999. "Risk sharing: private insurance markets or redistributive taxes?," Staff Report 262, Federal Reserve Bank of Minneapolis.
  6. Arnott, Richard & Stiglitz, Joseph E, 1991. "Moral Hazard and Nonmarket Institutions: Dysfunctional Crowding Out or Peer Monitoring?," American Economic Review, American Economic Association, vol. 81(1), pages 179-90, March.
  7. P. A. Diamond & J. A. Mirrlees, 1977. "A Model of Social Insurance With Variable Retirement," Working papers 210, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Anderberg, Dan & Andersson, Fredrik, 2000. "Social Insurance with Risk-Reducing Investments," Economica, London School of Economics and Political Science, vol. 67(265), pages 37-56, February.
  9. Thomas, Jonathan & Worrall, Tim, 1988. "Self-enforcing Wage Contracts," Review of Economic Studies, Wiley Blackwell, vol. 55(4), pages 541-54, October.
  10. Whinston, Michael D., 1983. "Moral hazard, adverse selection, and the optimal provision of social insurance," Journal of Public Economics, Elsevier, vol. 22(1), pages 49-71, October.
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