Optimal unemployment insurance and cyclical fluctuations

Rui Li and Noah Williams

No 2015-2, FRB Atlanta CQER Working Paper from Federal Reserve Bank of Atlanta

Abstract: The authors study the design of optimal unemployment insurance in an environment with moral hazard and cyclical fluctuations. The optimal unemployment insurance contract balances the insurance motive to provide consumption for the unemployed with the provision of incentives to search for a job. This balance is affected by aggregate conditions, as recessions are characterized by reductions in job finding rates. We show how benefits should vary with aggregate conditions in an optimal contract. In a special case of the model, the optimal contract can be solved in closed form. We show how this contract can be implemented in a rather simple way by allowing unemployed workers to borrow and save in a bond (whose return depends on the state of the economy), providing flow payments that are constant over an unemployment spell but vary with the aggregate state, and giving additional lump-sum payments (or charges) upon finding a job or when the aggregate state switches. We then consider a calibrated version of the model and study the quantitative impact of changing from the current unemployment system to the optimal one. In a recession, the optimal system reduces unemployment rates by roughly 2.5 percentage points and shortens the duration of unemployment by about 50 percent.

Keywords: optimal contracts; unemployment benefits; lump-sum payments; welfare; unemployment durations (search for similar items in EconPapers)
JEL-codes: E32 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2015-08-01
New Economics Papers: this item is included in nep-dge, nep-ias, nep-mac and nep-pbe
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.frbatlanta.org/-/media/documents/cqer/ ... ngpapers/2015/02.pdf (application/pdf)

Related works:
Working Paper: Optimal Unemployment Insurance and Cyclical Fluctuations (2014)
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:fip:fedacq:15-02

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in FRB Atlanta CQER Working Paper from Federal Reserve Bank of Atlanta Contact information at EDIRC.
Bibliographic data for series maintained by Rob Sarwark ().