Optimal Unemployment Insurance In Ge: A Robustcalibration Approach

Marco Cozzi

No 1272, Working Paper from Economics Department, Queen's University

Abstract: This paper implements a simple Monte Carlo calibration approach to quantitatively studythe Hansen and Imrohoroglu (1992) economy, a GE model with uninsurable employment risk,designed to assess the optimal replacement rate for a public Unemployment Insurance scheme.The results of this sensitivity analysis are consistent with the original findings, but withseveral caveats. One novel result in particular is that the sampling distribution of the optimalUI is bimodal. Depending on the calibrated parameters, the optimal UI is in one of two regions:a very generous scheme with high replacement rates, where insurance is mainly provided bythe UI scheme, or one with low replacement rates, where insurance is mainly achieved throughself-insurance. Even in the absence of moral hazard, it is never optimal to provide full insurance.Moreover, for many plausible parameters` conÂ…gurations, the welfare maximizing replacement ratedoes not decrease with the level of MH. The qualitative patterns and quantitative fiÂ…ndings arenot altered substantially when considering an enlarged labor force, which includes the marginallyattached workers. Finally, the parameters representing the hours worked, the leisure share inthe households` consumption bundle, and the risk aversion have a fiÂ…rst order impact on theaverage welfare. The determination of the optimal UI scheme depends heavily on them. ThisfiÂ…nding suggests that extra caution should be paid when calibrating these parameters in similarenvironments.

Keywords: Calibration methods; Unemployment Risk; Optimal Unemployment Insurance; Heterogeneous Agents; Incomplete Markets; Computable General Equilibrium; Monte Carlo (search for similar items in EconPapers)
JEL-codes: D52 D58 E21 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2011-08
New Economics Papers: this item is included in nep-cmp, nep-dge, nep-ias, nep-lab and nep-mac
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https://www.econ.queensu.ca/sites/econ.queensu.ca/files/qed_wp_1272.pdf First version 2011 (application/pdf)

Related works:
Journal Article: Optimal unemployment insurance in GE: A robust calibration approach (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:qed:wpaper:1272

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