Should Ui Benefits Really Fall Over Time?

Abstract

The issue of whether unemployment benefits should increase or decrease over the unemployment spell is analyzed in a tractable model allowing moral hazard, adverse selection and hidden savings. Analytical results show that when the search productivity of the unemployed is constant over the unemployment spell, benefits should typically increase or be constant. The only exception is when there is a moral hazard and no hidden saving. In general, adverse selection problems tend to generate increasing benefits, moral hazard problems tend to generate constant benefits, and decreasing search productivity tends to generate falling benefits.

Keywords: Unemployment Insurance, Moral Hazard, Adverse Selection

JEL Classification: J65, J64, E24