Heterogeneity and Optimal Unemployment Insurance
by Hugo A. Hopenhayn and Juan Pablo Nicolini
This paper explores the effect of heterogeneity on the design of optimal unemployment insurance. Unemployed workers have an exogenously given baseline reemployment probability which is enhanced by search effort, not observable to the enforcing agency. Workers may differ in their search effectiveness or baseline reemployment probabilities. The effect of this heterogeneity on the optimal design is analyzed. In particular, the optimal insurance for workers with high duration risk is considered. The paper also analyzes the effect of labor market aggregate shocks that affect search effectiveness and/or the baseline probabilities. An optimal insurance arrangement that takes into account these aggregate shocks is analyzed. The paper provides some numerical examples, based on estimates of reemployment probababilities for Buenos Aires.
For the full text of this paper please contact the Poverty and Inequality Advisory Unit at povunit@iadb.org
Last updated: 04/26/07
