Optimal Unemployment Insurance and Costly Self-Control

65 Pages Posted: 26 Mar 2024 Last revised: 28 Apr 2024

See all articles by Zoe Xie

Zoe Xie

World Bank

Pei Cheng Yu

UNSW Australia Business School, School of Economics

Date Written: June 15, 2023

Abstract

This paper examines optimal unemployment insurance design when individuals prefer immediate rewards due to temptation and self-control problems. In addition to moral hazard, unemployment benefits also affect search effort through self-control costs. We show that the incentive constraint may not bind, potentially avoiding immiseration and justifying the need for a base income. Compared to setups without costly self-control, the optimal unemployment insurance features front-loaded consumption upon employment - lending theoretical support to back-to-work bonuses - while consumption for the unemployed is more back-loaded. Additionally, we provide quantitative evaluations of the optimum, highlighting its potential to significantly enhance welfare.

Keywords: Unemployment insurance, Job search, Temptation, Self-control, Moral hazard, Dynamic contracting, Immiseration

JEL Classification: D82, H53, I38, J65, J68

Suggested Citation

Xie, Zoe and Yu, Pei Cheng, Optimal Unemployment Insurance and Costly Self-Control (June 15, 2023). UNSW Business School Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=4759835 or http://dx.doi.org/10.2139/ssrn.4759835

Zoe Xie

World Bank ( email )

1818 H Street NW
Washington, DC 20433
United States

HOME PAGE: http://https://zoexie.weebly.com/

Pei Cheng Yu (Contact Author)

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

HOME PAGE: http://pcyu.weebly.com

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