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Incentive contracts and efficient unemployment benefits

Dominique Demougin () and Carsten Helm ()

No 191, Darmstadt Discussion Papers in Economics from Darmstadt University of Technology, Department of Law and Economics

Abstract: Several European countries have reformed their labor market institutions. Incentive effects of unemployment benefits have been an important aspect of these reforms. We analyze this issue in a principal-agent model, focusing on unemployment levels and labor productivity. In our model, a higher level of unemployment benefits improves the workers' position in wage bargaining, leading to stronger effort incentives and higher output. However, it also reduces incentives for labor market participation. Accordingly, there is a trade-off. We analyze how changes in the economic environment such as globalization and better educated workers affect this trade-off.

Keywords: Unemployment benefits; incentive contracts; Nash bargaining; moral hazard; globalisation (search for similar items in EconPapers)
JEL-codes: J65 D82 J41 E24 (search for similar items in EconPapers)
Date: 2008
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Working Paper: Incentive Contracts and Efficient Unemployment Benefits (2009) Downloads
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