Optimal Unemployment Insurance

JOURNAL OF POLITICAL ECONOMY, Vol. 105, No. 2, April 1997

Posted: 7 May 1997

See all articles by Hugo A. Hopenhayn

Hugo A. Hopenhayn

University of California, Los Angeles (UCLA) - Department of Economics

Juan Pablo Nicolini

Universitat Pompeu Fabra

Abstract

This paper considers the design of an optimal unemployment insurance system. The problem is modeled as a repeated principal-agent problem involving a risk-averse agent--the unemployed worker--and a risk-neutral principal, which cannot monitor the agent's search effort. The optimal long-term contract subject to the associated incentive constraints is characterized. This contract involves a replacement ratio that decreases throughout the unemployment spell and a wage tax after reemployment that, under some mild regularity conditions, increases with the length of the unemployment spell. Some numerical results are presented that suggest that the gains from switching to this optimal unemployment insurance scheme could be quite large. The performance of this optimal contract is also compared to alternative liquidity provision mechanisms.

JEL Classification: J65, D82

Suggested Citation

Hopenhayn, Hugo A. and Nicolini, Juan Pablo, Optimal Unemployment Insurance. JOURNAL OF POLITICAL ECONOMY, Vol. 105, No. 2, April 1997, Available at SSRN: https://ssrn.com/abstract=3935

Hugo A. Hopenhayn (Contact Author)

University of California, Los Angeles (UCLA) - Department of Economics ( email )

Box 951477
Los Angeles, CA 90095-1477
United States

Juan Pablo Nicolini

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain

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