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Optimal Unemployment Insurance with Endogenous UI Eligibility (No.E2012001)

Date:2012-10-22

Jia Pan (Fudan University), Min Zhang (SUFE)
October 22, 2012

Abstract: Many studies on optimal unemployment insurance (UI) assume universal benefits to the unemployed. This paper introduces UI eligibilitity rule, in a stylized way, into the framework by Hopenhayn and Nicolini (2009). The main contribution is to demonstrate that the consideration of the UI eligibility rule provides an additional incentive device to induce workers to work, and therefore, changes the nature of the optimal UI contract. Particularly, the presence of the UI eligibility rule generates entitlement effects, which mitigates moral hazard quits by eligible workers, and thus, helps fix the loophole highlighted in Hopenhayn and Nicolini (2009). Moreover, we find that strategic quits still show up in the optimal UI contract when monitoring on quits is weak and disutility of work is large. When this moral hazard behavior is taken into account by the UI agency, the consideration of the UI eligibility rule generates a differentiated UI contribution fee scheme for employed workers. Particularly, the optimal UI contract, which aims at implementing positive search efforts, promoting a valuable UI eligibility and eliminating moral hazard behavior, is featured with high and increasing UI contribution fees in the employment spell for the ineligible workers, while low and decreasing fees for the eligible ones. The differentiated UI fee scheme is missing in the existing literature, but is in line with the empirical evidence.
Keywords: Optimal UI Contract, UI Eligibility, Moral Hazard

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