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UI ELIGIBILITY RULE, MORAL HAZARD, AND OPTIMAL UNEMPLOYMENT TRANSFER SCHEME

Published online by Cambridge University Press:  21 June 2017

Min Zhang  and
Jia Pan
Min Zhang*
Affiliation:
East China Normal University
Jia Pan
Affiliation:
Fudan University
*
Address corresponding to: Min Zhang, Faculty of Economics and Management, East China Normal University, Room 1705, 3663 N. Zhongshan Road, Shanghai 200062, China; e-mail: mzhang@jjx.ecnu.edu.cn.
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Abstract

This paper derives the optimal unemployment insurance (UI) transfer scheme, UI benefits, and UI contribution fees: When a worker has to earn his or her UI eligibility through work, the UI benefits do not last forever, and the UI agency has imperfect monitoring power on the strategic behavior of the worker. We show that the consideration of the UI eligibility rule generates the effective entitlement effect, which serves as an additional incentive device and alters the nature of the optimal UI transfer scheme established in literature. In contrast with previous studies, we find that when the effective entitlement effect is large, it completely removes the moral hazards in job searches, job acceptances, and job quits. As a result, the optimal UI benefits and contribution fees become constant. Calibrated to the data in the United States, the model reproduces some key features of the existing UI system.

Keywords

Optimal UI TransferUI EligibilityEntitlement EffectMoral HazardMonitoring
Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 4 , June 2019 , pp. 1586 - 1621
Copyright
Copyright © Cambridge University Press 2017 

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Footnotes

We are grateful to Miquel Faig, Shouyong Shi, Cheng Wang, Ed Green, Xiaodong Zhu, Paul Beaudry, Todd Keister, Ed Nosal, and Yuzhe Zhang for their insightful comments and suggestions. We would like to thank participants at the Shanghai Macroeconomics Workshop, the Tsinghua Workshop in Economics, and the annual Money, Macro, and Finance Conference at Trinity College Dublin for their helpful comments and discussions. Min Zhang thanks the National Natural Science Foundation of China (No. 71673172) and Fundamental Research Funds for the Central Universities (No. 2017ECNU-HLYT004) for the financial support. All errors are our own.

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