Unemployment Insurance with Hidden Savings
This paper studies the design of unemployment insurance when neither the searching effort nor the savings of an unemployed agent can be monitored. If the principal could monitor the savings, the optimal policy would leave the agent savings-constrained. With a constant absolute risk-aversion (CARA) utility function, we obtain a closed form solution of the optimal contract. Under the optimal contract, the agent is neither saving nor borrowing constrained. Counter-intuitively, his consumption declines faster than implied by Hopenhayn and Nicolini . The efficient allocation can be implemented by an increasing benefit during unemployment and a constant tax during employment.
|Date of creation:||Mar 2010|
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- Abraham, Arpad & Pavoni, Nicola, 2004.
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04-05, Duke University, Department of Economics.
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Cowles Foundation Discussion Papers
503, Cowles Foundation for Research in Economics, Yale University.
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- Árpád Ábrahám & Nicola Pavoni, 2008. "Optimal Income Taxation and Hidden Borrowing and Lending: The First-Order Approach in Two Periods," Carlo Alberto Notebooks 102, Collegio Carlo Alberto.
- Noah Williams, 2004. "On Dynamic Principal-Agent Problems in Continuous Time," Levine's Bibliography 122247000000000426, UCLA Department of Economics.
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