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

Tan Wang and Tony Wirjanto (twirjant@uwaterloo.ca)

Working Paper series from Rimini Centre for Economic Analysis

Abstract: 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.

Keywords: Unemployment insurance; income; utility function; Brownian motions; search; waiting; exit; continuation region (search for similar items in EconPapers)
Date: 2013-05
New Economics Papers: this item is included in nep-ias
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Persistent link: https://EconPapers.repec.org/RePEc:rim:rimwps:31_13

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