Optimal unemployment insurance in search equilibrium

Should unemployment benefits be paid indefinitely at a fixed rate or should the rate decline (or increase) over a worker's unemployment spell? We exam ine these issues using an equilibrium model of search unemployment. The mod el features worker-firm bargaining over wages, free entry of new jobs, and endogenous search effort among the unemployed. The main result is that an o ptimal insurance program implies a declining benefit sequence over the spel l of unemployment. Numerical calibrations of the model suggest that there m ay be nontrivial welfare gains associated with switching from an optimal un iform benefit structure to an optimally differentiated system.