Incentive Contracts and Efficient Unemployment Benefits
25 Pages Posted: 4 Mar 2009 Last revised: 5 Apr 2009
Date Written: February 23, 2009
Several European countries have reformed their labor market institutions. Incentive effects of unemployment benefits have been an important aspect of these reforms. We analyze this issue in a principal-agent model, focusing on unemployment levels and labor productivity. In our model, a higher level of unemployment benefits improves the worker's position in wage bargaining, leading to stronger effort incentives and higher output. However, it also reduces incentives for labor market participation. Accordingly, there is a trade-off. We analyze how changes in the economic environment such as globalization and better educated workers affect this trade-off.
Keywords: Unemployment benefits, incentive contracts, Nash bargaining, moral hazard, globalization
JEL Classification: J65, D82, J41, E24
Suggested Citation: Suggested Citation