Unemployment Insurance with Limited Commitment Wage Contracts and Savings

Rigas Oikonomou

No 2016006, LIDAM Discussion Papers IRES from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: I present a model of optimal contracts between firms and workers, under limited commitment and with worker savings. In the model, firms provide insurance against unemployment through targeting a frontloaded path of wages which encourages wealth accumulation. I provide analytical results characterising the wage and savings schedules and the path of consumption during employment and unemployment. I then consider how unemployment benefits affect risk sharing through private markets. I find that benefits should be frontloaded; the government has the incentive to drive the allocation to the point where the firm's participation constraint binds. At this point wages are equal to productivity in every period, wealth exceeds the buffer stock level, and consumption and savings drop over time. The drop in the level of consumption during unemployment is mitigated. Finally, I compare the optimal contract model to the standard heterogeneous agent model whereby wealth is utilized for self-insurance purposes. I show that the two models are equivalent under the optimal UI policy.

Keywords: Unemployment Insurance; Incomplete Markets; Optimal Contracts; Limited Commitment; Household Self-Insurance (search for similar items in EconPapers)
JEL-codes: D52 E21 H31 H53 J41 (search for similar items in EconPapers)
Pages: 45
Date: 2016-02-28
New Economics Papers: this item is included in nep-cta, nep-dge, nep-ias, nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://sites.uclouvain.be/econ/DP/IRES/2016006.pdf (application/pdf)

Related works:
Journal Article: Unemployment insurance with limited commitment wage contracts and savings (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ctl:louvir:2016006

Access Statistics for this paper

More papers in LIDAM Discussion Papers IRES from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) Place Montesquieu 3, 1348 Louvain-la-Neuve (Belgium). Contact information at EDIRC.
Bibliographic data for series maintained by Virginie LEBLANC ().