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Figuring out the Impact of Hidden Savings on Optimal Unemployment Insurance

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  • Narayana Kocherlakota

    (Stanford University)

Abstract

In this paper, I consider the problem of optimal unemployment insurance in a world in which the unemployed agent's job-finding effort is unobservable and his level of savings is unobservable. I show that the first-order approach is not always valid for this problem, and I argue that the available recursive procedures are not currently computationally feasible. Nonetheless, for the case in which the disutility of effort is linear, I am able to provide a complete characterization of the optimal contract: the agent's consumption is constant while he is unemployed, and jumps up to a higher constant and history-independent level of consumption when he finds a job. (Copyright: Elsevier)

Suggested Citation

  • Narayana Kocherlakota, 2004. "Figuring out the Impact of Hidden Savings on Optimal Unemployment Insurance," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(3), pages 541-554, July.
    • Handle: RePEc:red:issued:v:7:y:2004:i:3:p:541-554
    DOI: 10.1016/j.red.2004.01.003
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    1. Noah Williams, 2004. "On Dynamic Principal-Agent Problems in Continuous Time," Levine's Bibliography 122247000000000426, UCLA Department of Economics.
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