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Uncertainty, Unemployment Insurance, Individual's Optimal Stopping Time and Duration of Unemployment


  • Tan Wang

    (Sauder School of Business, Finance Division, University of British Columbia, Canada)

  • Tony S. Wirjanto

    () (School of Accounting & Finance and Department of Statistics & Actuarial Science, University of Waterloo, Canada)


Building on the tools developed for American call options in financial markets and the optimal timing of investment under uncertainty in economics, this paper proposes a stylized equilibrium model to study the optimal time for a risk-averse unemployed individual, who receives an unemployment insurance benefit and may receive a recall from the old job, to exit from a waiting (and hence unemployment) state and start a new job. It is shown that as a result of the individual’s exercising the optimal timing strategy, there is a duration of "waiting" and that this duration is affected by a number of economic factors, prominent among which are uncertainty on the part of the unemployed individual and the attitude of this individual toward risk.

Suggested Citation

  • Tan Wang & Tony S. Wirjanto, 2013. "Uncertainty, Unemployment Insurance, Individual's Optimal Stopping Time and Duration of Unemployment," Working Paper series 31_13, Rimini Centre for Economic Analysis.
  • Handle: RePEc:rim:rimwps:31_13

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    References listed on IDEAS

    1. Albrecht, James W & Axell, Bo, 1984. "An Equilibrium Model of Search Unemployment," Journal of Political Economy, University of Chicago Press, vol. 92(5), pages 824-840, October.
    2. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-969, July.
    3. Pindyck, Robert S, 1991. "Irreversibility, Uncertainty, and Investment," Journal of Economic Literature, American Economic Association, vol. 29(3), pages 1110-1148, September.
    4. Avinash Dixit, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 107-132, Winter.
    5. Lawrence F. Katz, 1986. "Layoffs, Recall and the Duration of Unemployment," NBER Working Papers 1825, National Bureau of Economic Research, Inc.
    6. Tan Wang & Tony Wirjanto, 1997. "The Role of Risk Aversion and Uncertainty in Individual's Migration Decision," Working Papers 98003, University of Waterloo, Department of Economics, revised Nov 1997.
    7. Lucas, Robert Jr. & Prescott, Edward C., 1974. "Equilibrium search and unemployment," Journal of Economic Theory, Elsevier, vol. 7(2), pages 188-209, February.
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    More about this item


    Unemployment insurance; income; utility function; Brownian motions; search; waiting; exit; continuation region;

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