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Unemployment Insurance and Precautionary Savings: Transitional Dynamics vs. Steady State Equilibrium

Authors registered in the RePEc Author Service: Thomas Weitzenblum ()

No 96, Computing in Economics and Finance 2001 from Society for Computational Economics

Abstract: In this study, we ask whether the presence of precautionary savings substantially reduces the optimal replacement rate in an economy characterized by equilibrium unemployment and moral hazard. In line with previous studies, the optimality criterion based on comparisons of steady states leads to a low optimal ratio. Yet, this result ignores potential transitional costs due to the necessity for agents to increase their savings and reduce their consumption whenever the ratio is cut. We therefore build a dynamic model taking full account of the transition, and show that steady state optimality is not robust to transitional costs.

Keywords: equilibrium unemployment; job search; moral hazard; precautionary savings; unemployment insurance (search for similar items in EconPapers)
JEL-codes: J64 D31 C61 (search for similar items in EconPapers)
Date: 2001-04-01
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