Risk Aversion, Uncertainty, Unemployment Insurance Benefit and Duration of "Wait" Unemployment

Tan Wang () and Tony Wirjanto ()
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Tan Wang: Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University
Tony Wirjanto: School of Accounting & Finance and Department of Statistics & Actuarial Science, University of Waterloo

Annals of Economics and Finance, 2016, vol. 17, issue 1, 1-34

Abstract: Building on the tools developed for American call options in financial markets in Finance 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 unemployed individual's exercising her optimal timing strategy, there is duration of so-called waiting and that this duration is affected by a number of economic primitives, prominent among which are the attitude of an unemployed individual toward risk and the uncertainty faced by this individual.

Keywords: Unemployment insurance; Income; Utility function; Brownian motions; Search; Waiting; Exit; Continuation region (search for similar items in EconPapers)
JEL-codes: D81 D84 E24 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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