OPTIMAL UNEMPLOYMENT-INSURANCE

This paper considers the design of an optimal unemployment insurance s ystem. The problem is modeled as a repeated principal-agent problem in volving a risk-averse agent-the unemployed worker-and a risk-neutral p rincipal, which cannot monitor the agent's search effort. The optimal long-term contract subject to the associated incentive constraints is characterized, This contract involves a replacement ratio that decreas es throughout the unemployment spell and a wage tax after reemployment that, under some mild regularity conditions, increases with the lengt h of the unemployment spell. Some numerical results are presented that suggest that the gains from switching to this optimal unemployment in surance scheme could be quite large. The performance of this optimal c ontract is also compared to alternative liquidity provision mechanisms .