Endogenous unemployment insurance in a monopoly union model when job search matters

Abstract

The aim of the paper is to derive an optimal unemployment insurance policy for a utilitarian trade union when job search matters. It is shown that the well-known result from the theory of insurance concerning the optimal risk sharing between risk averse agents changes essentially, if the search behavior is allowed to affect the performance of the labor market. We assume that labor market mismatch decreases with search effort, which in turn decreases with the benefit. The resulting equilibrium benefit is shown to be a decreasing function of the trade union's share of the costs of the insurance fund. The model is also extended to the case where the benefit is made conditional on monitored search effort.