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Efficient Unemployment Insurance

This paper constructs a tractable general equilibrium model of search with risk aversion. An increase in risk aversion reduces wages, unemployment, and investment. Unemployment insurance has the opposite effect: insured workers seek high‐wage jobs with high unemployment risk. An economy with risk‐neutral workers achieves maximal output without any unemployment insurance, but an economy with risk‐averse workers requires a positive level of unemployment insurance to maximize output. Therefore, moderate unemployment insurance not only improves risk sharing but also increases output.

Authors: 
Daron Acemoglu, Massachusetts Institute of Technology
Robert Shimer, University of Chicago
Publication Date: 
January, 1999
HCEO Working Groups: 
Publication Type: 
Journal: 
Journal of Political Economy
Volume: 
107
Issue Number: 
5
Pages: 
893-928