On the Optimal Timing of Benefits with Heterogeneous Workers and Human Capital Depreciation

34 Pages Posted: 14 Jul 2006 Last revised: 26 Jul 2006

See all articles by Robert Shimer

Robert Shimer

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Iván Werning

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: May 2006

Abstract

This paper studies the optimal timing of unemployment insurance subsidies in a McCall search model. Risk-averse workers sequentially sample random job opportunities. Our model distinguishes unemployment subsidies from consumption during unemployment by allowing workers to save and borrow freely. When the insurance agency faces a group of homogeneous workers solving stationary search problems, the optimal subsidies are independent of unemployment duration. In contrast, when workers are heterogeneous or when human capital depreciates during the spell, the optimal subsidy is no longer constant. We explore the main determinants of the shape of the optimal subsidy schedule, isolating forces for subsidies to optimally rise or fall with duration.

Suggested Citation

Shimer, Robert J. and Werning, Ivan, On the Optimal Timing of Benefits with Heterogeneous Workers and Human Capital Depreciation (May 2006). NBER Working Paper No. w12230, Available at SSRN: https://ssrn.com/abstract=902582

Robert J. Shimer (Contact Author)

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Ivan Werning

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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HOME PAGE: http://econ-www.mit.edu/faculty/iwerning

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