Unemployment Insurance Design: Inducing Moving and Retraining

52 Pages Posted: 23 May 2008

See all articles by John Hassler

John Hassler

Stockholm University - Institute for International Economic Studies (IIES); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

José Vicente Rodríguez Mora

University of Southampton - School of Social Science - Economics Division

Date Written: June 2007

Abstract

Evidence suggests that unemployed individuals can sometimes affect their job prospects by undertaking a costly action like deciding to move or retrain. Realistically, such an opportunity only arises for some individuals and the identity of those may be unobservable ex-ante. The problem of characterizing constrained optimal unemployment insurance in this case has been neglected in previous literature. We construct a model of optimal unemployment insurance where multiple incentive constraints are easily handled. The model is used to analyze the case when an incentive constraint involving moving costs must be respected in addition to the standard constraint involving costly unobservable job-search. In particular, we derive closed-form solutions showing that when the moving/retraining incentive constraint binds, unemployment benefits should increase over the unemployment spell, with an initial period with low benefits and an increase after this period has expired.

Keywords: adverse selection, moral hazard, search, Unemployment benefits

JEL Classification: E24, J64, J65

Suggested Citation

Hassler, John and Rodríguez Mora, José Vicente, Unemployment Insurance Design: Inducing Moving and Retraining (June 2007). CEPR Discussion Paper No. DP6364, Available at SSRN: https://ssrn.com/abstract=1136689

John Hassler (Contact Author)

Stockholm University - Institute for International Economic Studies (IIES) ( email )

Stockholm, SE-10691
Sweden
+46 816 2070 (Phone)
+46 816 1443 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

IZA Institute of Labor Economics

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

José Vicente Rodríguez Mora

University of Southampton - School of Social Science - Economics Division ( email )

Southampton, SO17 1BJ
United Kingdom

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