Efficient Unemployment Insurance
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NBER Working Paper No. 6686
Issued in August 1998
NBER Program(s): LS PE
This paper constructs a tractable general equilibrium model of search with risk-aversion. An increase in risk-aversion reduces wages, unemployment, and investment. Unemployment insurance (UI) has the reverse effect due to market generated moral hazard: insured workers seek high wage jobs with high unemployment risk. An economy with risk-neutral workers achieves maximal output without any UI. In contrast, in an economy with risk-averse workers, a positive level of UI maximizes output. Therefore, moderate UI not only improves risk-sharing, but also increases output.
Published: Journal of Political Economy, Vol. 107, no. 5 (1999): 893-928.
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