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Unemployment Insurance with Moral Hazard in a Dynamic Economy

Author

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  • Williamson, S.

    (University of Iowa)

  • Wang, C.

Abstract

We study a dynamic model with positive gross flows between employment and unemployment. There is moral hazard associated with search effort and job-retention effort. A quantitative comparison of the unemployment insurance system currently in place in the United States with an optimal system shows that the optimal system reduces the steady state unemployment rate by 3.40 percentage points and increases output by 3.64\%. The optimal system involves a large subsidy for a transition from unemployment to employment and a large penalty for a transition from employment to unemployment.
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Suggested Citation

  • Williamson, S. & Wang, C., 1995. "Unemployment Insurance with Moral Hazard in a Dynamic Economy," Working Papers 95-09, University of Iowa, Department of Economics.
    • Handle: RePEc:uia:iowaec:95-09
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    More about this item

    Keywords

    LABOUR MARKET; UNEMPLOYMENT INSURANCE;

    JEL classification:

    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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