On the Optimality of Search Matching Equilibrium When Workers are Risk Averse

18 Pages Posted: 11 Dec 2007

See all articles by Etienne Lehmann

Etienne Lehmann

CREST; Catholic University of Louvain (UCL) - School of Economic and Social Research (IRES); IZA Institute of Labor Economics

Bruno Van der Linden

Université Catholique de Louvain - Institut de Recherches Economiques et Sociales; IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: 2006-04-17

Abstract

This paper revisits the normative properties of search-matching economies when homogeneous workers have concave utility functions and wages are bargained over. The optimal allocation of resources is characterized first when information is perfect and second when search effort is not observable. In the former case, employees should be unable to extract a rent. The optimal marginal tax rate is then 100%. As search effort becomes unobservable, an appropriate positive rent is needed and the optimal marginal tax rate is lower. Moreover, the pretax wage is lower in order to boost labor demand. Finally, in both cases, nonlinear income taxation is a key complement to unemployment insurance.

Suggested Citation

Lehmann, Etienne and Van der Linden, Bruno, On the Optimality of Search Matching Equilibrium When Workers are Risk Averse (2006-04-17). Journal of Public Economic Theory, Vol. 9, Issue 5, pp. 867-884, October 2007. Available at SSRN: https://ssrn.com/abstract=1067132 or http://dx.doi.org/10.1111/j.1467-9779.2007.00335.x

Catholic University of Louvain (UCL) - School of Economic and Social Research (IRES) ( email )

3, Place Montesquieu
1348 Louvain-la-Neuve
Belgium

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Bruno Van der Linden

Université Catholique de Louvain - Institut de Recherches Economiques et Sociales ( email )

3, Place Montesquieu
Louvain-la-Neuve, 1348
Belgium

HOME PAGE: http://perso.uclouvain.be/bruno.vanderlinden/

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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