Optimal Welfare-to-Work Programs

A Welfare-to-Work (WTW) program is a mix of government expenditures on various labour market policies targeted to the unemployed ( e.g. unemployment insurance (UI), job search monitoring (JM), social assistance (SA), wage subsidies). This paper provides a dynamic principal–agent framework suitable for analysing chief features of an optimal WTW program, such as the sequence and duration of the different policies, the dynamic pattern of payments along the unemployment spell, and the emergence of taxes/subsidies upon re-employment. The optimal program endogenously generates an absorbing policy of last resort ("social assistance") characterized by a constant lifetime payment and no active participation by the agent. Human capital depreciation is a necessary condition for policy transitions to be part of an optimal WTW program. The typical sequence of policies is quite simple: the program starts with standard UI, then switches into monitored search and, finally, into SA. The optimal benefits are decreasing during unemployment insurance and constant during both JM and SA. Whereas taxes (subsidies) can be either increasing or decreasing with duration during UI, they must decrease (increase) during a phase of JM. In a calibration exercise, we use our model to analyse quantitatively the features of the optimal program for the U.S. economy. With respect to the existing U.S. system, the optimal WTW scheme delivers sizeable welfare gains to unskilled workers because the incentives to search for a job can be retained even while delivering more insurance and using costly monitoring less intensively.     

Dynamic risk-sharing with two-sided moral hazard

A group of risk-averse agents repeatedly produce a perishable consumption good; individual outputs are observable but efforts are not. The contracting problem admits a recursive formulation, and the optimal value function is the fixed point of a contraction mapping. When the agents can be punished to the full extent in a single period, every continuation contract of an optimal contract is itself optimal; the marginal utility ratio between one agent and another is a submartingale. The results imply that it is in general important to restrict an agent whose moral hazard constraint is binding from saving through another agent within the risk-sharing group. Limited commitment and long-run implications of optimal contracting are also examined.     

Optimal unemployment insurance with heterogeneous agents

The framework of a general equilibrium heterogeneous agent model is used to study the optimal design of an unemployment insurance (UI) scheme and preferences for unemployment policy reforms. In a first step, the optimal defined benefit and defined replacement ratio UI systems are obtained in simulations. Then, the question whether switching to such an optimal system from the status quo would be approved by a majority of the population is explored. Finally, the transitional dynamics following a policy change are analysed. Accounting for this transition has an important influence on the support for a policy change.     

Knightian uncertainty and moral hazard

This paper presents a principal-agent model in which the agent has imprecise beliefs. We model this situation formally by assuming the agent?s preferences are incomplete as in Bewley (1986) [2]. In this setting, incentives must be robust to Knightian uncertainty. We study the implications of robustness for the form of the resulting optimal contracts. We give conditions under which there is a unique optimal contract, and show that it must have a simple flat payment plus bonus structure. That is, output levels are divided into two sets, and the optimal contract pays the same wage for all output levels in each set. We derive this result for the case in which the agent?s utility function is linear and then show it also holds if this utility function has some limited curvature.     

Optimal risk sharing and borrowing constraints in a continuous-time model with limited commitment

We study a continuous-time version of the optimal risk-sharing problem with one-sided commitment. In the optimal contract, the agent?s consumption is a time-invariant, strictly increasing function of a single state variable: the maximal level of the agent?s income realized to date. We characterize this function in terms of the agent?s outside option value function and the discounted amount of time in which the agent?s income process is expected to reach a new to-date maximum. Under constant relative risk aversion we solve the model in closed-form: optimal consumption of the agent equals a constant fraction of his maximal income realized to date. In the complete-markets implementation of the optimal contract, the Alvarez–Jermann solvency constraints take the form of a simple borrowing constraint familiar from the Bewley–Aiyagari incomplete-markets models.     

Optimal voting schemes with costly information acquisition

A group of individuals with identical preferences must make a decision under uncertainty about which decision is best. Before the decision is made, each agent can privately acquire a costly and imperfect signal. We discuss how to design a mechanism for eliciting and aggregating the collected information so as to maximize ex-ante social welfare.We first show that, of all mechanisms, a sequential one is optimal and works as follows. At random, one agent at a time is selected to acquire information and report the resulting signal. Agents are informed of neither their position in the sequence nor of other reports. Acquiring information when called upon and reporting truthfully is an equilibrium.We next characterize the ex-ante optimal scheme among all ex-post efficient mechanisms. In this mechanism, a decision is made when the precision of the posterior exceeds a cut-off that decreases with each additional report. The restriction to ex-post efficiency is shown to be without loss when the available signals are sufficiently imprecise. On the other hand, ex-post efficient mechanisms are shown to be suboptimal when the cost of information acquisition is sufficiently small.     

The German Unemployment Compensation System: Effects On Aggregate Savings And Wealth Distribution

The effects of the German unemployment compensation system on aggregate savings and the distribution of wealth are studied in a general equilibrium 60–period OLG model. The distribution of wealth is derived as an endogenous function of the parameters characterizing the unemployment compensation system, which comprises unemployment insurance (Arbeitslosengeld), unemployment assistance (Arbeitslosenhilfe), and welfare payments (Sozialhilfe), the latter two being subject to a means test. As our main results: (i) both aggregate savings and wealth equality are a monotone decreasing function of unemployment benefits; (ii) optimal unemployment compensation declines over the spell of unemployment; (iii) asset–based means tests are shown to reduce welfare if the allowable wealth level is below the average wealth in the economy.     

OPTIMAL UNEMPLOYMENT INSURANCE,WITH HUMAN CAPITAL DEPRECIATION,AND DURATION DEPENDENCE*

This article introduces the possibility of a deterioration in job opportunities during unemployment into the standard optimal unemployment insurance (UI) design framework and characterizes the efficient UI scheme. The optimal program may display two novel features, which cannot be present in stationary models. First, UI transfers are bounded below by a minimal assistance level that arises endogenously in the efficient contract. Second, the optimal scheme implies a wage subsidy for long‐term unemployed workers. Numerical simulations based on the Spanish and U.S. economies suggest that both assistance transfers and wage subsidies should be part of the UI scheme in these countries.     

The Role of Bargaining Initiative Under no Commitment to Audit

This paper addresses the issue of the optimal contract design under costly state verification and no commitment to auditing when the contract offer comes from the uninformed party. Contrary to similar frameworks and to cases where the informed party retains the bargaining power, we find that the optimal contract is characterised neither by truth telling nor by mixed strategy equilibria. Depending on endogenous revenues and observation cost, a pooling equilibrium with either deterministic or random auditing occurs.     

The Choice of Technology and Equilibrium Wage Rigidity

In this general equilibrium model, firms engage in oligopolistic competition and choose increasing returns technologies to maximize profits. Capital and labor are the two factors of production. The existence of efficiency wages leads to unemployment. The model is able to explain some interesting observations of the labor market. First, even though there is neither long-term labor contract nor costs of wage adjustment, wage rigidity is an equilibrium phenomenon: an increase in the exogenous job separation rate, the size of the population, the cost of exerting effort, and the probability that shirking is detected will not change the equilibrium wage rate. Second, the equilibrium wage rate increases with the level of capital stock. Third, a higher level of capital stock does not necessarily reduce the unemployment rate. That is, there is no monotonic relationship between capital accumulation and the unemployment rate.     

Why it Pays to Conceal: On the Optimal Timing of Acquiring Verifiable Information

Abstract. We consider optimal contracts when a principal has two sources to detect bad projects. The first one is an information technology without agency costs (IT_P), whereas the second one is the expertise of an agent subject to moral hazard, adverse selection and limited liability (IT_A). First, we show that the principal does not necessarily benefit from access to additional information and thereby may prefer to ignore it. Second, we discuss different timings of information release, i.e., a disclosure contract offered to the agent after the principal announced the result of IT_P , and a concealment contract where the agent exerts effort before IT_P is checked. We find that concealment is superior whenever the quality of IT_P is sufficiently low. Then, IT_P is almost worthless under a disclosure contract, while it can still be exploited to reduce the agent's information rent under concealment. If the quality of IT_P improves, disclosure can be superior as it allows to adjust the agent's effort to the updated expected quality of the project. However, even for a highly informative IT_P , concealment can be superior as it mitigates the adverse selection problem.     

Optimal Social Insurance with Endogenous Health*

In this paper, I analyze optimal insurance against unemployment and disability in a private information economy with endogenous health and search effort. Individuals can reduce the probability of becoming disabled by exerting prevention effort. I show that the optimal sequence of consumption is increasing for a working individual and constant for a disabled individual. During unemployment, decreasing benefits are not necessarily optimal. The prevention constraint implies increasing benefits while the search constraint demands decreasing benefits while being unemployed. However, if individuals respond sufficiently to search incentives, the latter effect dominates the former and the optimal consumption sequence is decreasing during unemployment.     

Optimal growth theory: Challenging problems and suggested answers

We argue that optimal economic growth is confronting serious applicability problems, having nothing to offer in these days of high public deficits accompanied by high unemployment rates. In particular, the theory is not capable of indicating optimal savings rates; those are systematically in ranges that can be considered as unacceptable, or are accompanied by unrealistically high real growth rates. Faulty is the systematic use of arbitrary utility functions, which turn out to be contradictory to competitive equilibrium. We then show how relying on the hypothesis of competitive equilibrium yields reasonable, perfectly acceptable numbers for the optimal savings rate.     

Task assignment and organizational form

This paper shows that a firm prefers a process-based task assignment compared to a function-based one if the tasks are from functional areas which are neither too complementary nor too substitutable. We consider several projects (processes) with contributions from several functional areas. The organization can be structured along processes like product lines (M-form) or along functional areas like marketing or production (U-form). The U-form enables cost savings due to specialization or scale economies. The more effective incentives under the M-form might outweigh these savings if the functions are neither too complementary nor too substitutable.      

不完全合同、创新与联合投资

本文结合美国硅谷的实际情况,基于不完全合同理论从联合投资和创新激励二者之间的关系展开研究.通过建立两期模型研究认为,合同不完全正是导致创业资本家发生窃取行为的客观原因.这种情况下,企业家和创业资本家双方的努力投入是不足的;而通过联合投资可以使得投资双方的努力投入达到最优,并给出了最优的联合投资规模.     

Short or long-term contract? Firm’s optimal choice

This article studies the behaviour of a firm searching to fill a vacancy. The main assumption is that the firm can offer two different kinds of contracts to the workers, either a short-term contract or a long-term one. The short-term contract acts as a probationary stage in which the firm can learn about the worker. After this stage, the firm can propose a long-term contract to the worker or it can decide to look for another worker. We show that, if the short-term wage is fixed endogenously, it can be optimal for firms to start a working relationship with a short-term contract, but that this policy decreases unemployment and welfare. On the contrary, if the wage is fixed exogenously, this policy could be optimal also from a welfare point of view.     

Task assignment under agent loss aversion

We analyze a task-assignment model in which a principal assigns a task to one of two agents depending on future states. If the agents have concave utility, the principal assigns the task to them contingent on the state. We show that if the agents are loss averse, a state-independent assignment–assigning the task to a single agent in all states–can be optimal even when the principal can write a contingent contract at no cost.     

Optimal Unemployment Insurance and Employment History

In existing unemployment insurance programmes, it is standard to condition eligibility on the previous employment record of unemployed workers. The purpose of this article is to study conditions under which the efficient contract exhibits these properties. In order to do so, we characterize the optimal unemployment insurance contract in asymmetric information environments in which workers experience multiple unemployment spells. We show that if quits cannot be distinguished from layoffs, it is optimal to condition the benefits paid to unemployed workers on their employment history, in particular, the coverage should increase with the length of previous employment spells.     

Time of the essence

In most industries, ranging from information systems development to construction, an overwhelming proportion of projects are delayed beyond estimated completion time. This fact constitutes somewhat of a puzzle for existing theory. The present paper studies project delays and optimal contracts under moral hazard in a setting with time to build. Within this setup, project delays are found to be most likely to happen at early stages of development and intimately connected to the degree of commitment of the procurer and the class of contracts that can be enforced. The first-best, optimal spot contracting and optimal long-term contract scenarios are analyzed, as well as commonly encountered additional constraints on the long-term contract.     

Ex post participation constraint in a principal–agent model with adverse selection and moral hazard

This paper analyzes optimal contracting when an agent has private information before contracting and exerts hidden effort that stochastically affects the output. Additionally, the contract is constrained to satisfy the agentʼs ex post participation. We highlight three features of this model. First, the agent faces countervailing incentives. Second, the separation of types is never optimal. Third, the optimal constant bonus rewarding success is distorted downward below its efficient level.