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The B.E. Journal of Macroeconomics

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Unemployment insurance with limited commitment wage contracts and savings

Rigas Oikonomou
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  • IRES, Université Catholique de Louvain, Collège L. H. Dupriez, 3 Place Montesquieu 1348 Louvain la Neuve, Belgium
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Published Online: 2017-07-18 | DOI: https://doi.org/10.1515/bejm-2014-0162

Abstract

I present a model of optimal contracts between firms and workers, under limited commitment and with worker savings. In the model, firms provide insurance against unemployment through targeting a frontloaded path of wages which encourages wealth accumulation. I provide analytical results characterising the wage and savings schedules and the path of consumption during employment and unemployment. I then consider how unemployment benefits affect risk sharing through private markets. I find that benefits should be frontloaded; the government has the incentive to drive the allocation to the point where the firm’s participation constraint binds. At this point wages are equal to productivity in every period, wealth exceeds the buffer stock level, and consumption and savings drop over time. The drop in the level of consumption during unemployment is mitigated. Finally, I compare the optimal contract model to the standard heterogeneous agent model whereby wealth is utilized for self-insurance purposes. I show that the two models are equivalent under the optimal UI policy.

This article offers supplementary material which is provided at the end of the article.

Keywords: household self-insurance; incomplete markets; limited commitment; optimal contracts; unemployment insurance

JEL Classification: D52; E21; H31; H53; J41

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About the article

Published Online: 2017-07-18


Citation Information: The B.E. Journal of Macroeconomics, Volume 18, Issue 1, 20140162, ISSN (Online) 1935-1690, DOI: https://doi.org/10.1515/bejm-2014-0162.

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