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Unemployment Insurance with Moral Hazard in a Dynamic Economy

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  • Stephen Williamson

    (Economics: University of Iowa)

  • Cheng Wang

    (Iowa City, IA 52242)

Abstract

We study a dynamic model with positive gross flows between employment and unemployment. There is moral hazard associated with search effort and job-retention effort. A quantitative comparison of the unemployment insurance system currently in place in the United States with an optimal system shows that the optimal system reduces the steady state unemployment rate by 3.40 percentage points and increases output by 3.64\%. The optimal system involves a large subsidy for a transition from unemployment to employment and a large penalty for a transition from employment to unemployment.

Suggested Citation

  • Stephen Williamson & Cheng Wang, 1995. "Unemployment Insurance with Moral Hazard in a Dynamic Economy," Macroeconomics 9506002, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpma:9506002
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    References listed on IDEAS

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    • E - Macroeconomics and Monetary Economics

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