Optimal Unemployment Insurance with Variable Skill Levels

Andreas Pollak
2008 Journal of Institutional and Theoretical Economics  
I study the consequences of heterogeneity of skills for the design of an optimal unemployment insurance, using a principal-agent set-up with a risk neutral insurer and infinitely lived risk averse agents. Agents are characterised by different productivities. They are employed by firms offering wages that depend both on the agents' individual productivity and the quality of the worker-firm-match. Agents face the risk of losing their job and, if unemployed, they are offered jobs with different
more » ... ch qualities. No search effort by the agent is needed to get offers. Individual productivity declines during unemployment due to depreciation of skills and increases on the job because of learning by doing. Any insurance offered must take into account the moral hazard problem created by the fact that job offers are private information to the agent. A further complication is due to the unobservability of an agent's productivity. I find that under an optimal contract, periods of unemployment are characterised by declining benefits. Agents are further punished for long unemployment by reducing expected future utility. A new result obtained from this approach is the observation that under an efficient contract, agents whose productivity is relatively high tend to have a shorter unemployment duration and a higher productivity growth in the future. The mechanism to induce truthful reporting of an agent's productivity is to make his utility depend on the quality of the jobs he accepts. JEL Classification: C61, D78, D82, D83, J24, J31, J38, J64, J65, J78
doi:10.1628/093245608786534659 fatcat:nqox7kkdfjefrp22cwq2qg3rp4