Moral Hazard and Optimal Unemployment Insurance in an Economy with Heterogeneous Skills

In the presence of even small moral hazard, Hansen & Imrohoroglu (1992) show that the unemployment insurance should be much less generous than without moral hazard. This has important implications in the light of recent reforms. We question this result by adding a social component to the model: agents are heterogeneous in skills and may differ in their wage income as well as in their transition in and out of unemployment. Our dynamic general equilibrium model finds that much higher moral hazard is needed until unemployment insurance becomes significantly less generous