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Optimal Unemployment Insurance with Monitoring

  • Ofer Setty

    (Tel Aviv University)

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    I study a principal-agent problem in which the principal can obtain additional costly information about the agent's effort. I analyze this problem in the context of optimal unemployment insurance a la Hopenhayn and Nicolini (1997), where job-search effort is private information. I calibrate the model to the US economy and use it for two purposes. First, I show that for CRRA utility, the optimal contract dictates that monitoring frequency increases and the sanction decreases with promised utility, if and only if the coefficient of risk aversion is greater than 0.5. Second, I show that compared to optimal unemployment insurance and estimated at the balanced budget point, monitoring saves about eighty percent of the cost associated with moral hazard.

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    Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 26.

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    Date of creation: 2013
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    Handle: RePEc:red:sed013:26
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    1. van den Berg, Gerard J. & van der Klaauw, Bas, 2001. "Counseling and Monitoring of Unemployed Workers: Theory and Evidence from a Controlled Social Experiment," IZA Discussion Papers 374, Institute for the Study of Labor (IZA).
    2. van den Berg, Gerard J, 1994. "The Effects of Changes of the Job Offer Arrival Rate on the Duration of Unemployment," Journal of Labor Economics, University of Chicago Press, vol. 12(3), pages 478-98, July.
    3. Boone, J. & Fredriksson, P. & Holmlund, B. & van Ours, J.C., 2001. "Optimal Unemployment Insurance with Monitoring and Sanctions," Discussion Paper 2001-85, Tilburg University, Center for Economic Research.
    4. Berg, Gerard J. van den & Klaauw, Bas van der & Ours, Jan C. van, 1998. "Punitive sanctions and the transition rate from welfare to work," Serie Research Memoranda 0033, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
    5. Fougère, Denis & Pradel, Jacqueline & Roger, Muriel, 2005. "Does Job-Search Assistance Affect Search Effort and Outcomes? A Microeconometric Analysis of Public versus Private Search Methods," IZA Discussion Papers 1825, Institute for the Study of Labor (IZA).
    6. Hopenhayn, H. & Nicolini, P.J., 1996. "Optimal Unemployment Insurance," RCER Working Papers 421, University of Rochester - Center for Economic Research (RCER).
    7. Jaap H. Abbring & Gerard J. Berg & Jan C. Ours, 2005. "The Effect of Unemployment Insurance Sanctions on the Transition Rate from Unemployment to Employment," Economic Journal, Royal Economic Society, vol. 115(505), pages 602-630, 07.
    8. Atila Abdulkadiroglu & Burhanettin Kuruscu & Aysegul Sahin, 2002. "Unemployment Insurance and the Role of Self-Insurance," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(3), pages 681-703, July.
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