An adverse selection model of optimal unemployment insurance

Marcus Hagedorn, Ashok Kaul and Tim Mennel

No B 30-2002, ZEI Working Papers from University of Bonn, ZEI - Center for European Integration Studies

Abstract: We derive the shape of optimal unemployment insurance (UI) contracts when agents can exert search effort but face different search costs and have private information about their type. We derive a recursive solution of our dynamic 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 an information rent and that the bad searcher receives the minimal entitlement. From a methodological point of view, we achieve a precise characterization of the sets of jointly feasible entitlements. This allows us to map our analytical results one-toone 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; Moral Hazard (search for similar items in EconPapers)
JEL-codes: C61 D82 E61 J64 J65 (search for similar items in EconPapers)
Date: 2002
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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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 (2004)
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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