Incentive Contracts and Efficient Unemployment Benefits

25 Pages Posted: 4 Mar 2009 Last revised: 5 Apr 2009

See all articles by Dominique Demougin

Dominique Demougin

EBS Universität für Wirtschaft und Recht - EBS Business School - Department of Governance & Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Carsten Helm

University of Oldenburg - Public Economics

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Date Written: February 23, 2009

Abstract

Several European countries have reformed their labor market institutions. Incentive effects of unemployment benefits have been an important aspect of these reforms. We analyze this issue in a principal-agent model, focusing on unemployment levels and labor productivity. In our model, a higher level of unemployment benefits improves the worker's position in wage bargaining, leading to stronger effort incentives and higher output. However, it also reduces incentives for labor market participation. Accordingly, there is a trade-off. We analyze how changes in the economic environment such as globalization and better educated workers affect this trade-off.

Keywords: Unemployment benefits, incentive contracts, Nash bargaining, moral hazard, globalization

JEL Classification: J65, D82, J41, E24

Suggested Citation

Demougin, Dominique and Helm, Carsten, Incentive Contracts and Efficient Unemployment Benefits (February 23, 2009). European Business School Research Paper No. 09-01, Available at SSRN: https://ssrn.com/abstract=1351713 or http://dx.doi.org/10.2139/ssrn.1351713

Dominique Demougin (Contact Author)

EBS Universität für Wirtschaft und Recht - EBS Business School - Department of Governance & Economics ( email )

International University Schloss Reichartshausen
Campus Wiesbaden, Soehnleinstrasse 8A
Wiesbaden, 65201
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Muenchen, 81679
Germany

Carsten Helm

University of Oldenburg - Public Economics ( email )

Department of Economics and Law
Oldenburg, 26111
Germany
+49 441 798-4113 (Phone)

HOME PAGE: http://www.fiwi.uni-oldenburg.de/

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