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Unemployment Insurance under Moral Hazard and Limited Commitment:Public versus Private Provision

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  • Tim Worall
  • Jonathan P Thomas

Abstract

This paper analyzes a model of private unemployment insurance under limited commitment and a model of public unemployment insurance subject to moral hazard in an economy with a continuum of agents and an infinite time horizon. The dynamic and steady‐state properties of the optimum private unemployment insurance scheme are established. The interaction between public and private unemployment insurance schemes is examined. Examples are constructed to show that for some parameter values increased public insurance can reduce welfare by crowding out private insurance more than one‐to‐one and that for other parameter values a mix of both public and private insurance can be welfare maximizing.
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Suggested Citation

  • Tim Worall & Jonathan P Thomas, 2005. "Unemployment Insurance under Moral Hazard and Limited Commitment:Public versus Private Provision," 2005 Meeting Papers 158, Society for Economic Dynamics.
    • Handle: RePEc:red:sed005:158
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    References listed on IDEAS

    as
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    7. Coate, Stephen & Ravallion, Martin, 1993. "Reciprocity without commitment : Characterization and performance of informal insurance arrangements," Journal of Development Economics, Elsevier, vol. 40(1), pages 1-24, February.
    8. Rafael Di Tella & Robert MacCulloch, 2002. "Informal Family Insurance And The Design Of The Welfare State," Economic Journal, Royal Economic Society, vol. 112(481), pages 481-503, July.
    9. Attanasio, Orazio & Rios-Rull, Jose-Victor, 2000. "Consumption smoothing in island economies: Can public insurance reduce welfare?," European Economic Review, Elsevier, vol. 44(7), pages 1225-1258, June.
    10. Ethan Ligon & Jonathan P. Thomas & Tim Worrall, 2000. "Mutual Insurance, Individual Savings and Limited Commitment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(2), pages 216-246, April.
    11. Arnott, Richard & Stiglitz, Joseph E, 1991. "Moral Hazard and Nonmarket Institutions: Dysfunctional Crowding Out or Peer Monitoring?," American Economic Review, American Economic Association, vol. 81(1), pages 179-190, March.
    12. Dan Anderberg & Fredrik Andersson, 2000. "Social Insurance with Risk‐Reducing Investments," Economica, London School of Economics and Political Science, vol. 67(265), pages 37-56, February.
    13. Schoeni, R.F. & Blank, R.M., 2000. "What Has Welfare Reform Accomplished? Impacts on Welfare Participation, Employment, Income, Poverty, and Family Structure," Papers 00-02, RAND - Labor and Population Program.
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    Citations

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    Cited by:

    1. Dirk Krueger & Fulin Li & Harald Uhlig, 2024. "Neoclassical Growth Transition Dynamics with One-Sided Commitment," PIER Working Paper Archive 24-020, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    2. Zhang, Yuzhe, 2013. "Characterization of a risk sharing contract with one-sided commitment," Journal of Economic Dynamics and Control, Elsevier, vol. 37(4), pages 794-809.
    3. Krueger, Dirk & Perri, Fabrizio, 2011. "Public versus private risk sharing," Journal of Economic Theory, Elsevier, vol. 146(3), pages 920-956, May.
    4. Lancia, Francesco & Russo, Alessia & Worrall, Tim S, 2020. "Optimal Sustainable Intergenerational Insurance," CEPR Discussion Papers 15540, C.E.P.R. Discussion Papers.
    5. Mazur, Karol, 2023. "Sharing risk to avoid tragedy: Informal insurance and irrigation in village economies," Journal of Development Economics, Elsevier, vol. 161(C).
    6. Tobias Broer, 2013. "The Wrong Shape of Insurance? What Cross-Sectional Distributions Tell Us about Models of Consumption Smoothing," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(4), pages 107-140, October.
    7. Lin, Wanchuan & Meng, Juanjuan & Weng, Xi, 2020. "Formal insurance and informal risk sharing dynamics," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 837-863.
    8. Lee, Hangsuck & Ryu, Doojin & Son, Jihoon, 2022. "Insurance-adjusted valuation, decision making, and capital return," International Review of Financial Analysis, Elsevier, vol. 84(C).
    9. Oikonomou Rigas, 2018. "Unemployment insurance with limited commitment wage contracts and savings," The B.E. Journal of Macroeconomics, De Gruyter, vol. 18(1), pages 1-21, January.
    10. Broer, Tobias, 2014. "Domestic or global imbalances? Rising income risk and the fall in the US current account," Journal of Monetary Economics, Elsevier, vol. 64(C), pages 47-67.
    11. Dirk Krueger, 2006. "Public Insurance against Idiosyncratic and Aggregate Risk: The Case of Social Security and Progressive Income Taxation," CESifo Economic Studies, CESifo Group, vol. 52(4), pages 587-620, December.
    12. Broer, Tobias, 2011. "Crowding out and crowding in: When does redistribution improve risk-sharing in limited commitment economies?," Journal of Economic Theory, Elsevier, vol. 146(3), pages 957-975, May.
    13. Krzysztof Szczygielski, 2021. "Public provisions of professional services," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 23(2), pages 345-362, April.
    14. Picard, Pierre M. & Worrall, Tim, 2020. "Currency areas and voluntary transfers," Journal of International Economics, Elsevier, vol. 127(C).
    15. Lin, Wanchuan & Liu, Yiming & Meng, Juanjuan, 2014. "The crowding-out effect of formal insurance on informal risk sharing: An experimental study," Games and Economic Behavior, Elsevier, vol. 86(C), pages 184-211.
    16. Tim Worrall & Alessia Russo & Francesco Lancia, 2017. "Sustainable Intergenerational Insurance," 2017 Meeting Papers 319, Society for Economic Dynamics.
    17. Karol Mazur, 2020. "Sharing Risk to Avoid Tragedy: Informal Insurance and Irrigation in Village Economies," CSAE Working Paper Series 2020-19, Centre for the Study of African Economies, University of Oxford.

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    More about this item

    Keywords

    Social Insurance; Moral Hazard; Limited Commitment; Unemployment Insurance; Crowding Out.;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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