Efficient unemployment insurance

This paper constructs a tractable general equilibrium model of search with risk aversion. An increase in risk aversion reduces wages, unemployment, an d investment. Unemployment insurance has the opposite effect: insured worke rs seek high-wage jobs with high unemployment risk. An economy with risk-ne utral workers achieves maximal output without any unemployment insurance, b ut an economy with risk-averse workers requires a positive level of unemplo yment insurance to maximize output. Therefore, moderate unemployment insura nce not only improves risk sharing but also increases output.