An adverse selection model of optimal unemployment insurance

Arbeitspapier

We derive the shape of optimal unemployment insurance (UI) contracts when agents can exert search effort but face different search costs and have private information about their type. We derive a recursive solution of our dynamic adverse selection problem with repeated moral hazard. Conditions under which the UI agency should always offer separating contracts are identified. We show that the good searcher receives an information rent and that the bad searcher receives the minimal entitlement. From a methodological point of view, we achieve a precise characterization of the sets of jointly feasible entitlements. This allows us to map our analytical results one-toone to a numerical algorithm. According to our results the contract for the good searcher has a decreasing benefit profile, as the one he would be offered in a pure moral hazard environment. In contrast, the contract of the bad searcher is distorted by an adverse selection effect, so that it tends to have an upward-sloping benefit profile. We provide a comparative static analysis of changes in various parameters of our model.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ZEI Working Paper ; No. B 30-2002

Classification and Topics

• Classification: Wirtschaft ; Unemployment Insurance; Severance Pay; Plant Closings ; Unemployment: Models, Duration, Incidence, and Job Search ; Asymmetric and Private Information; Mechanism Design ; Optimization Techniques; Programming Models; Dynamic Analysis ; Policy Objectives; Policy Designs and Consistency; Policy Coordination
• Subject: Unemployment Insurance ; Adverse Selection ; Moral Hazard ; Arbeitslosenversicherung ; Anreizvertrag ; Arbeitsuche ; Adverse Selection ; Moral Hazard ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Hagedorn, Marcus ; Kaul, Ashok ; Mennel, Tim
• Event: Veröffentlichung
• (who): Rheinische Friedrich-Wilhelms-Universität Bonn, Zentrum für Europäische Integrationsforschung (ZEI)
• (where): Bonn
• (when): 2002

Further information

• Handle: http://hdl.handle.net/10419/39447
• Last update: 10.03.2025, 11:41 AM CET