An Adverse Selection Model of Optimal Unemployment Insurance

Marcus Hagedorn, Ashok Kaul and Tim Mennel

No 237, IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich

Abstract: We ask whether offering a menu of unemployment insurance contracts is welfare improving in a heterogeneous population. We adopt a repeated moral-hazard framework as in Shavell/Weiss (1979) supplemented by unobserved heterogeneity about agents� job opportunities. Our main theoretical contribution is an analytical characterization of the sets of jointly feasible entitlements that renders an efficient computation of these sets feasible. Our main economic result is that optimal contracts for �bad� searchers tend to be upward-sloping due to an adverse-selection effect. This is in contrast to the well-known optimal decreasing time-profile of benefits in pure moral hazard environments that continue to be optimal for �good� searchers in our model.

Keywords: Unemployment Insurance; Recursive Contracts; Adverse Selection; Repeated Moral Hazard (search for similar items in EconPapers)
JEL-codes: C61 D82 E61 J64 J65 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-ias and nep-mac
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Citations: View citations in EconPapers (18)

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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 (2002)
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