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Optimal Unemployment Insurance with Variable Skill Levels

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Author Info
Andreas Pollak (University of Freiburg)

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Abstract

I study the consequences of heterogeneity of skills for the design of an optimal unemployment insurance, using a principal-agent set-up with a risk neutral insurer and infinitely lived risk averse agents. Agents, who are characterised by different productivities or skills, are employed by firms offering wages that depend both on the agents’ individual skill level and the quality of the worker-firm-match. Agents face the risk of losing their job and, while unemployed, are offered jobs with different match qualities. No search effort by the agent is needed to receive offers. Individual productivity declines during unemployment due to depreciation of skills and increases on the job because of learning by doing. Any insurance offered must take into account the moral hazard problem created by the fact that job offers are private information to the agent. A further complication is due to the unobservability of an agent’s productivity. I find that under an optimal contract, periods of unemployment are characterised by declining benefits. Agents are further punished for long unemployment by reducing expected future utility. A new result obtained from this approach is the observation that under an efficient contract, agents whose productivity is relatively high tend to have a shorter unemployment duration and a higher productivity growth in the future. Unemployment benefits do not only depend on an agent’s employment history, but also on the skills reported by the agent. Agents are punished for accepting jobs that do not seem to be in line with their reported skills.

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Publisher Info
Paper provided by EconWPA in its series Labor and Demography with number 0409004.

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Length: 32 pages
Date of creation: 08 Sep 2004
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Handle: RePEc:wpa:wuwpla:0409004

Note: Type of Document - pdf; pages: 32
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Web page: http://129.3.20.41

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Related research
Keywords: Unemployment Insurance; Human Capital; Adverse Selection; Moral Hazard;

Other versions of this item:

Find related papers by JEL classification:
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis
D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy-Making and Implementation
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search
J65 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment Insurance; Severance Pay; Plant Closings
J78 - Labor and Demographic Economics - - Labor Discrimination - - - Public Policy (including comparable worth)

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    Other versions:
  3. Pissarides, Christopher A, 1992. "Loss of Skill during Unemployment and the Persistence of Employment Shocks," The Quarterly Journal of Economics, MIT Press, vol. 107(4), pages 1371-91, November. [Downloadable!] (restricted)
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    Other versions:
  5. Daron Acemoglu & Robert Shimer, 1999. "Efficient Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 893-928, October. [Downloadable!] (restricted)
    Other versions:
  6. Fredriksson, Peter & Holmlund, Bertil, 2001. "Optimal Unemployment Insurance in Search Equilibrium," Journal of Labor Economics, University of Chicago Press, vol. 19(2), pages 370-99, April. [Downloadable!] (restricted)
    Other versions:
  7. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Blackwell Publishing, vol. 38(114), pages 175-208, April. [Downloadable!] (restricted)
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  10. Eric M. Engen & Jonathan Gruber, 1995. "Unemployment Insurance and Precautionary Saving," NBER Working Papers 5252, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Atila Abdulkadiroglu & Burhanettin Kuruscu & Aysegul Sahin, 2002. "Unemployment Insurance and the Role of Self-Insurance," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(3), pages 681-703, July. [Downloadable!] (restricted)
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  12. James Costain, 1997. "Unemployment Insurance with Endogenous Search Intensity and Precautionary Saving," Economics Working Papers 243, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  13. Thomas, Jonathan & Worrall, Tim, 1990. "Income fluctuation and asymmetric information: An example of a repeated principal-agent problem," Journal of Economic Theory, Elsevier, vol. 51(2), pages 367-390, August. [Downloadable!] (restricted)
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  15. Lars Ljungqvist & Thomas J. Sargent, 1998. "The European Unemployment Dilemma," Journal of Political Economy, University of Chicago Press, vol. 106(3), pages 514-550, June. [Downloadable!] (restricted)
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  16. Wang, Cheng & Williamson, Stephen, 1996. "Unemployment insurance with moral hazard in a dynamic economy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 44(1), pages 1-41, June. [Downloadable!] (restricted)
    Other versions:
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