Unemployment Insurance with Hidden Savings

Mitchell, Matthew and Zhang, Yuzhe (2010): Unemployment Insurance with Hidden Savings. Forthcoming in: Journal of Economic Theory

Abstract

This paper studies the design of unemployment insurance when neither the searching effort nor the savings of an unemployed agent can be monitored. If the principal could monitor the savings, the optimal policy would leave the agent savings-constrained. With a constant absolute risk-aversion (CARA) utility function, we obtain a closed form solution of the optimal contract. Under the optimal contract, the agent is neither saving nor borrowing constrained. Counter-intuitively, his consumption declines faster than implied by Hopenhayn and Nicolini [4]. The efficient allocation can be implemented by an increasing benefit during unemployment and a constant tax during employment.

• Item Type: MPRA Paper
• Language: English
• Keywords: hidden savings, hidden wealth, repeated moral hazard, unemployment insurance.
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D86 - Economics of Contract: Theory; J - Labor and Demographic Economics > J6 - Mobility, Unemployment, Vacancies, and Immigrant Workers > J65 - Unemployment Insurance ; Severance Pay ; Plant Closings; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design

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