An adverse selection model of optimal unemployment insurance

Marcus Hagedorn, Ashok Kaul and Tim Mennel

Journal of Economic Dynamics and Control, 2010, vol. 34, issue 3, 490-502

Abstract: We ask whether offering a menu of unemployment insurance contracts is welfare-improving in a heterogeneous population. We adopt a repeated moral hazard framework as in Shavell and Weiss (1979), supplemented by unobserved heterogeneity about agents' job opportunities. Our main theoretical contribution is a quasi-recursive formulation of our adverse selection problem, including a geometric characterization of the state space. Our main economic result is that optimal contracts for "bad" searchers tend to be upward-sloping due to an adverse selection effect. This is in contrast to the well-known optimal decreasing time profile of benefits in pure moral hazard environments that continue to be optimal for "good" searchers in our model.

Keywords: Unemployment; insurance; Recursive; contracts; Adverse; selection; Repeated; moral; hazard (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (8)

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Related works:
Working Paper: An Adverse Selection Model of Optimal Unemployment Insurance (2007)
Working Paper: An Adverse Selection Model of Optimal Unemployment Insurance (2004)
Working Paper: An Adverse Selection Model of Optimal Unemployment Insurance (2004)
Working Paper: An Adverse Selection Model of Optimal Unemployment Insurance (2002)
Working Paper: An adverse selection model of optimal unemployment insurance (2002)
Working Paper: An Adverse Selection Model of Optimal Unemployment Insurance
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:34:y:2010:i:3:p:490-502

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