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Efficient Unemployment Insurance

  • Daron Acemoglu
  • Robert Shimer

This paper constructs a tractable general equilibrium model of search with risk-aversion. An increase in risk-aversion reduces wages, unemployment, and investment. Unemployment insurance (UI) has the reverse effect due to market generated moral hazard: insured workers seek high wage jobs with high unemployment risk. An economy with risk-neutral workers achieves maximal output without any UI. In contrast, in an economy with risk-averse workers, a positive level of UI maximizes output. Therefore, moderate UI not only improves risk-sharing, but also increases output.

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File URL: http://www.nber.org/papers/w6686.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6686.

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Date of creation: Aug 1998
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Publication status: published as Journal of Political Economy, Vol. 107, no. 5 (1999): 893-928.
Handle: RePEc:nbr:nberwo:6686
Note: LS PE
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