Unemployment Insurance with Hidden Savings

43 Pages Posted: 3 Jun 2010 Last revised: 25 Jul 2012

See all articles by Matthew F. Mitchell

Matthew F. Mitchell

Rotman School of Management

Yuzhe Zhang

Texas A&M University

Date Written: April 1, 2010

Abstract

This paper studies the design of unemployment insurance when neither the searching effort nor the savings of an unemployed agent can be monitored. If the principal could monitor the savings, the optimal policy would leave the agent savings-constrained. With a constant absolute risk-aversion (CARA) utility function, we obtain a closed form solution of the optimal contract. Under the optimal contract, the agent is neither saving nor borrowing constrained. Counter-intuitively, his consumption declines faster than implied by Hopenhayn and Nicolini. The efficient allocation can be implemented by an increasing benefit during unemployment and a constant tax during employment.

Keywords: hidden savings, hidden wealth, repeated moral hazard, unemployment insurance

JEL Classification: D82, D86, J65

Suggested Citation

Mitchell, Matthew F. and Zhang, Yuzhe, Unemployment Insurance with Hidden Savings (April 1, 2010). Journal of Economic Theory, Vol 145, 2078-2107, 2010., Available at SSRN: https://ssrn.com/abstract=1619999

Matthew F. Mitchell

Rotman School of Management ( email )

Toronto, Ontario M5S 3E6
Canada

Yuzhe Zhang (Contact Author)

Texas A&M University ( email )

Langford Building A
798 Ross St.
College Station, TX 77843-3137
United States

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