Envy-Minimizing Unemployment Benefits

This paper offers an analysis of the optimality of unemployment benefits based on the concept of no-envy. Using a general equilibrium framework whit uncertainty, we derive the conditions for a trade-off between the intensity of envy and the expected percentage of envious persons. If the government’s aversion for the intensity of envy is not too strong (alongside conditions on households’ utilities), the optimal benefit is positive and below the full insurance level. We also show that, for a low enough aversion for the intensity of envy, the optimal replacement ratio decreases with unfavorable changes in the distribution of the technological shock.