Unemployment Insurance Design: Inducing Moving and Retraining
52 Pages Posted: 23 May 2008
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: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Labor Supply Effects of Social Insurance
By Alan B. Krueger and Bruce D. Meyer
-
Cash-on-Hand and Competing Models of Intertemporal Behavior: New Evidence from the Labor Market
By David Card, Raj Chetty, ...
-
Moral Hazard vs. Liquidity and Optimal Unemployment Insurance
By Raj Chetty
-
Liquidity and Insurance for the Unemployed
By Robert Shimer and Iván Werning
-
Liquidity and Insurance for the Unemployed
By Iván Werning and Robert Shimer
-
A General Formula for the Optimal Level of Social Insurance
By Raj Chetty
-
Unemployment Insurance Savings Accounts
By Martin S. Feldstein and Daniel Altman
-
Reservation Wages and Unemployment Insurance
By Robert Shimer and Iván Werning
-
Reservation Wages and Unemployment Insurance
By Robert Shimer and Iván Werning