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Optimal Unemployment Insurance in a Matching Equilibrium

  • Adrian Masters
  • Melvyn Coles

This paper considers the optimal design of unemployment insurance (UI) within an equilibrium matching framework when wages are determined by strategic bargaining. Unlike the Nash bargaining approach, reducing UI payments with duration is welfare increasing. A co-ordinated policy approach, however, one that chooses job creation subsidies and UI optimally, implies a much greater welfare gain than one which considers optimal UI alone. Once job creation subsidies are chosen optimally, the welfare value of making UI payments duration dependent is small.

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File URL: http://www.albany.edu/economics/research/workingp/2004/raweb.pdf
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Paper provided by University at Albany, SUNY, Department of Economics in its series Discussion Papers with number 04-12.

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Date of creation: 2004
Date of revision:
Handle: RePEc:nya:albaec:04-12
Contact details of provider: Postal: Department of Economics, BA 110 University at Albany State University of New York Albany, NY 12222 U.S.A.
Phone: (518) 442-4735
Fax: (518) 442-4736

Order Information: Postal: Department of Economics, BA 110 University at Albany State University of New York Albany, NY 12222 U.S.A.
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  1. Acemoglu, D. & Shimer, R., 1997. "Efficient Unemployment Insurance," Working papers 97-9, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Carl Davidson & Stephen A. Woodbury, . "Optimal Unemployment Insurance," Upjohn Working Papers and Journal Articles cdsaw1997, W.E. Upjohn Institute for Employment Research.
  3. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
  4. Dale T. Mortensen, 1977. "Unemployment insurance and job search decisions," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 30(4), pages 505-517, July.
  5. James Albrecht & Susan Vroman, 2005. "Equilibrium Search With Time-Varying Unemployment Benefits," Economic Journal, Royal Economic Society, vol. 115(505), pages 631-648, 07.
  6. Harold L. Cole & Richard Rogerson, 1996. "Can the Mortonson-Pissarides matching model match the business cycle facts?," Staff Report 224, Federal Reserve Bank of Minneapolis.
  7. James Costain, 1997. "Unemployment insurance with endogenous search intensity and precautionary saving," Economics Working Papers 243, Department of Economics and Business, Universitat Pompeu Fabra.
  8. Ausubel, Lawrence M & Deneckere, Raymond J, 1989. "Reputation in Bargaining and Durable Goods Monopoly," Econometrica, Econometric Society, vol. 57(3), pages 511-31, May.
  9. Melvyn Cole & Randall Wright, . "A Dynamic Equilibrium Model of Search, Bargaining, and Money," CARESS Working Papres 97-9, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
  10. Hopenhayn, H. & Nicolini, P.J., 1996. "Optimal Unemployment Insurance," RCER Working Papers 421, University of Rochester - Center for Economic Research (RCER).
  11. Coles, Melvyn G & Hildreth, Andrew, 1996. "Wage Bargaining, Inventories, and Union Legislation," CEPR Discussion Papers 1361, C.E.P.R. Discussion Papers.
  12. James Albrecht & Susan Vroman, 2000. "A Matching Model with Endogenous Skill Requirements," Econometric Society World Congress 2000 Contributed Papers 0774, Econometric Society.
  13. 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.
  14. Melvyn Coles & Adrian Masters, 2004. "Duration-Dependent Unemployment Insurance Payments and Equilibrium Unemployment," Economica, London School of Economics and Political Science, vol. 71, pages 83-97, 02.
  15. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
  16. Steven Shavell & Laurence Weiss, 1978. "The Optimal Payment of Unemployment Insurance Benefits over Time," Cowles Foundation Discussion Papers 503, Cowles Foundation for Research in Economics, Yale University.
  17. Larry M. Ausubel & Raymond J. Deneckere, 1989. "Reputation in Bargaining and Durable Goods Monopoly," Levine's Working Paper Archive 201, David K. Levine.
  18. Fredriksson, Peter & Holmlund, Bertil, 2001. "Optimal Unemployment Insurance in Search Equilibrium," Journal of Labor Economics, University of Chicago Press, vol. 19(2), pages 370-99, April.
  19. Adrian Masters & Melvyn Coles, 2004. "Duration Dependent Unemployment Insurance and Stabilisation Policy," Discussion Papers 04-10, University at Albany, SUNY, Department of Economics.
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