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Uncertainty, Unemployment Insurance, Individual's Optimal Stopping Time and Duration of Unemployment

Author

Listed:
  • Tan Wang

    (Sauder School of Business, Finance Division, University of British Columbia, Canada)

  • Tony S. Wirjanto

    (School of Accounting & Finance and Department of Statistics & Actuarial Science, University of Waterloo, Canada)

Abstract

Building on the tools developed for American call options in financial markets and the optimal timing of investment under uncertainty in economics, this paper proposes a stylized equilibrium model to study the optimal time for a risk-averse unemployed individual, who receives an unemployment insurance benefit and may receive a recall from the old job, to exit from a waiting (and hence unemployment) state and start a new job. It is shown that as a result of the individual’s exercising the optimal timing strategy, there is a duration of "waiting" and that this duration is affected by a number of economic factors, prominent among which are uncertainty on the part of the unemployed individual and the attitude of this individual toward risk.

Suggested Citation

  • Tan Wang & Tony S. Wirjanto, 2013. "Uncertainty, Unemployment Insurance, Individual's Optimal Stopping Time and Duration of Unemployment," Working Paper series 31_13, Rimini Centre for Economic Analysis.
    • Handle: RePEc:rim:rimwps:31_13
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    References listed on IDEAS

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    3. Lawrence F. Katz, 1986. "Layoffs, Recall and the Duration of Unemployment," NBER Working Papers 1825, National Bureau of Economic Research, Inc.
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    7. Tan Wang & Tony Wirjanto, 1997. "The Role of Risk Aversion and Uncertainty in Individual's Migration Decision," Working Papers 98003, University of Waterloo, Department of Economics, revised Nov 1997.
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    More about this item

    Keywords

    Unemployment insurance; income; utility function; Brownian motions; search; waiting; exit; continuation region;
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