Adverse selection and moral hazard: Quantitative implications for unemployment insurance |
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Institution: | 1. University of Chicago Booth School of Business, USA;2. NBER, USA;1. Sao Paulo School of Economics-FGV, Brazil;2. Michigan State University, United States;1. Harvard University, USA;2. Bank of International Settlements, Switzerland;3. INSEAD, France;1. Division of Monetary Affairs, Federal Reserve Board, Washington, DC 20551, USA;2. 4987 Preakness Place, Bethlehem, PA 18020, USA |
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Abstract: | A model of optimal unemployment insurance with adverse selection and moral hazard is constructed. The model generates both qualitative and quantitative implications for the optimal provision of unemployment insurance. Qualitatively, for some agents, incentives in the optimal contract imply consumption increases over the duration of non-employment. Calibrating the model to a stylized version of the U.S. economy quantitatively illustrates these theoretical predictions. The optimal contract achieves a welfare gain of 1.94% relative to the current U.S. system, an additional 0.87% of gains relative to a planner who ignores adverse selection and focuses only on moral hazard. |
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Keywords: | Unemployment insurance Non-participation Adverse selection Moral hazard Dynamic contracts |
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