Unemployment Insurance and Precautionary Savings : Transitional Dynamics vs. Steady State Equilibrium
In this study, we ask whether the presence of precautionary savings substantially reduces the optimal replacement rate in an economy characterized by equilibrium unemployment and moral hazard. In line with previous studies, the optimality criterion based on comparisons of steady states leads to a low optimal ratio. Yet, this result ignores potential transitional costs due to the necessity for agents to increase their savings and reduce their consumption whenever the ratio is cut. We therefore build a dynamic model taking full account of the transition, and show that steady state optimality is not robust to transitional costs.
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|Date of creation:||01 Apr 2001|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.econometricsociety.org/conference/SCE2001/SCE2001.html|
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