Unemployment Insurance Design: inducing moving and retraining

Sevi Rodriguez Mora, John Hassler

Research output: Contribution to journalArticlepeer-review

Abstract

Evidence suggests that unemployed individuals can affect their job prospects by undertaking a costly action like deciding to move or retrain. Realistically, such an opportunity only arises for some individuals and the identity of those may be unobservable ex ante. The problem of characterizing constrained optimal unemployment insurance in this case has been neglected in previous literature. We construct a model of optimal unemployment insurance where multiple incentive constraints are easily handled. The model is used to analyze the case when an incentive constraint involving moving costs must be respected in addition to the standard constraint involving costly unobservable job-search. Absent wealth effects on behavior, we derive closed-form solutions showing that when the moving/retraining incentive constraint binds, unemployment benefits should increase over the unemployment spell, with an initial period with low benefits and an increase after this period has expired.
Original languageEnglish
Pages (from-to)757-791
Number of pages35
JournalEuropean Economic Review
Volume52
Issue number5
DOIs
Publication statusPublished - Jul 2008

Keywords

  • adverse selection
  • moral hazard
  • search
  • unemployment benefits

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