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Equilibrium Unemployment Insurance

John Hassler (), José Vicente Rodríguez Mora, Kjetil Storesletten () and Fabrizio Zilibotti ()

No 2126, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In this paper, we incorporate a positive theory of unemployment insurance into a dynamic overlapping generations model with search-matching frictions and on-the-job learning-by-doing. The model shows that societies populated by identical rational agents, but differing in the initial distribution of human capital across agents, may choose very different unemployment insurance levels in a politico-economic equilibrium. The interaction between the political decision about the level of the unemployment insurance and the optimal search behavior of the unemployed gives rise to a self-reinforcing mechanism which may generate multiple steady-state equilibria. In particular, a European-type steady-state with high unemployment, low employment turnover and high insurance can co-exist with an American-type steady-state with low unemployment, high employment turnover and low unemployment insurance. A calibrated version of the model features two distinct steady-state equilibria with unemployment levels and duration rates resembling those of the U.S. and Europe, respectively.

Keywords: Comparative Advantage; Employment; Political Equilibrium; Search; Specialization; Unemployment Insurance (search for similar items in EconPapers)
JEL-codes: D72 E24 J24 J64 J65 (search for similar items in EconPapers)
Date: 1999-04
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Related works:
Working Paper: Equilibrium Unemployment Insurance (1999)
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