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An Adverse Selection Model of Optimal Unemployment


Hagedorn, Marcus; Kaul, Ashok; Mennel, Tim (2005). An Adverse Selection Model of Optimal Unemployment. Working paper series / Institute for Empirical Research in Economics No. 237, University of Zurich.

Abstract

We ask whether offering a menu of unemployment insurance contracts is welfare improving in a heterogeneous population. We adopt a repeated moral-hazard framework as in Shavell/Weiss (1979) supplemented by unobservednheterogeneity about agents’ job opportunities. Our main theoretical contribution is an analytical characterizationnof the sets of jointly feasible entitlements that renders annefficient computation of these sets feasible. Our main economicnresult is that optimal contracts for ”bad” searchers tend to be upward-sloping due to an adverse-selection effect.nThis is in contrast to the well-known optimal decreasingntime-profile of benefits in pure moral hazard environmentsnthat continue to be optimal for ”good” searchers in our model.

We ask whether offering a menu of unemployment insurance contracts is welfare improving in a heterogeneous population. We adopt a repeated moral-hazard framework as in Shavell/Weiss (1979) supplemented by unobservednheterogeneity about agents’ job opportunities. Our main theoretical contribution is an analytical characterizationnof the sets of jointly feasible entitlements that renders annefficient computation of these sets feasible. Our main economicnresult is that optimal contracts for ”bad” searchers tend to be upward-sloping due to an adverse-selection effect.nThis is in contrast to the well-known optimal decreasingntime-profile of benefits in pure moral hazard environmentsnthat continue to be optimal for ”good” searchers in our model.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Institute for Empirical Research in Economics (former)
Dewey Decimal Classification:330 Economics
Language:English
Date:March 2005
Deposited On:29 Nov 2011 22:32
Last Modified:05 Apr 2016 15:11
Series Name:Working paper series / Institute for Empirical Research in Economics
ISSN:1424-0459
Official URL:http://www.econ.uzh.ch/wp.html
Permanent URL: http://doi.org/10.5167/uzh-52129

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