Unemployment insurance with a hidden labor market

@inproceedings{AlvarezParra2009UnemploymentIW,
  title={Unemployment insurance with a hidden labor market},
  author={Fernando A. Alvarez-Parra and Juan Manuel S{\'a}nchez},
  year={2009}
}
This paper considers the problem of optimal unemployment insurance (UI) in a repeated moral hazard framework. Unlike existing literature, unemployed individuals can secretly participate in a hidden labor market. This extension modifies the standard problem in three dimensions. First, it imposes an endogenous lower bound for the lifetime utility that a contract can deliver. Second, it breaks the identity between unemployment payments and consumption. And third, it hardens the encouragement of… CONTINUE READING

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