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1 results

  • Optimal unemployment insurance with behavioral agents

  • Hon Chung Yeung
  • Journal:
    Macroeconomic Dynamics / Volume 28 / Issue 8 / December 2024
    Published online by Cambridge University Press:
    02 January 2024, pp. 1673-1681
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  • This paper studies how behavioral biases affect the optimal unemployment insurance. I revisit the optimal UI of Landais et al. (2018) and show how the optimal UI formula is modified and leads to novel economic insights. The optimal UI replacement rate is the conventional Baily-Chetty replacement rate, which solves the trade-off between liquidity and job-search incentives, plus a market tightness correction term which shows how welfare is affected by UI through tightness, and plus a behavioral bias correction term, which shows how welfare is affected by UI through job search effort.