An Adverse Selection Model of Optimal Unemployment Insurance

Marcus Hagedorn and Ashok Kaul

No 331, 2004 Meeting Papers from Society for Economic Dynamics

Abstract: We derive the shape of optimal unemployment insurance contracts when agents can exert search effort but have private information about their search technology. We derive a recursive solution of our adverse selection problem with repeated moral hazard. Conditions under which the UI agency should always offer separating contracts are identified. We show that the good searcher receives the minimal entitlement. Our main theoretical contribution is a numerically useful analytical characterization of the sets of jointly feasible entitlements. This allows us to map our analytical results one-to-one to a numerical algorithm. According to our results the contract for the good searcher has a decreasing benefit profile, as the one he would be offered in a pure moral hazard environment. In contrast, the contract of the bad searcher is distorted by an adverse selection effect, so that it tends to have an upward-sloping benefit profile. We provide a comparative static analysis of changes in various parameters of our model

Keywords: Unemployment Insurance; Adverse Selection; Repeated Moral Hazard (search for similar items in EconPapers)
JEL-codes: C61 D82 J64 J65 (search for similar items in EconPapers)
Date: 2004
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Related works:
Journal Article: An adverse selection model of optimal unemployment insurance (2010)
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 (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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