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Efficient Unemployment Insurance

Daron Acemoglu and Robert Shimer
Journal of Political Economy
Vol. 107, No. 5 (October 1999), pp. 893-928
DOI: 10.1086/250084
Stable URL: http://www.jstor.org/stable/10.1086/250084
Page Count: 36
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Efficient Unemployment Insurance
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Abstract

This paper constructs a tractable general equilibrium model of search with risk aversion. An increase in risk aversion reduces wages, unemployment, and investment. Unemployment insurance has the opposite effect: insured workers seek high‐wage jobs with high unemployment risk. An economy with risk‐neutral workers achieves maximal output without any unemployment insurance, but an economy with risk‐averse workers requires a positive level of unemployment insurance to maximize output. Therefore, moderate unemployment insurance not only improves risk sharing but also increases output.

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