Resource title

An Adverse Selection Model of Optimal Unemployment Insurance

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Resource description

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-to one 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.

Resource author

Marcus Hagedorn, Ashok Kaul, Tim Mennel

Resource publisher

Resource publish date

Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/20656

Resource license

Adapt according to the presented license agreement and reference the original author.