Optimal Unemployment Insurance with Endogenous Search Effort

Ping Yan
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Ping Yan: National School of Development, China Center for Economic Research, Peking University

Annals of Economics and Finance, 2011, vol. 12, issue 2, 347-369

Abstract: In the framework of a search and matching model, when search effort enters the labor market matching function, search effort by one worker generates a negative externality on other workers searching for jobs. The solution to the social planner's problem may not be decentralized in a competitive market. Calibration shows that the current US unemployment insurance (UI) system generates an 8.07% welfare loss relative to the socially optimal allocation. An alternative scheme with higher replacement rate and lower wage, which achieves the highest welfare level among all competitive equilibria with unemployment insurance, leads to a welfare loss of only 1.18%.

Keywords: Matching function; Search effort; Unemployment insurance (search for similar items in EconPapers)
JEL-codes: J30 J38 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (1)

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