Keywords: Unemployment benefits, search, moral hazard, adverse selection
JEL codes: J65, J64, E24
Abstract
Evidence suggests that unemployed individuals sometimes can affect their job prospects by undertaking a costly action like deciding to move or retrain. Realistically, such an opportunity arises only for some individuals and the identity of those is unobservable. Unemployment insurance should then be designed to induce individuals to exploit existing opportunities to move or retrain without excessively diminishing the insurance value for the remaining unemployed. This problem has been neglected in previous literature on unemployment insurance design and we show that it may have important consequences. In particular, we derive closed-form solutions, showing that unemployment benefits should increase over the unemployment spell, having an initial period with low benefits and a substantial increase after this period has expired.
