On the optimality of search matching equilibrium when workers are risk averse
(2002)
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- Abstract
- This paper revisits the normative properties of search-matching economies when workers have concave utility functions. A general equilibrium framework is developed where agents are homogeneous and wages are bargained over. Assuming lump-sum taxation of profits, the optimal allocation of resources is characterized first when information is perfect and second when unemployed people freely choose their search effort. Compared to the first case, the optimum is characterized by imperfect unemployment insurance and lower levels of search intensity and output in the second setting. To decentralize these optima, employees should be unable to extract a rent when information is perfect. An appropriate positive rent is however needed in the second case. When the bargaining power of the workers is given, these outcomes can be implemented through a well-designed non-linear tax schedule and an appropriate level of unemployment benefits. According to the level of the bargaining power, taxation can be progressive or regressive. Negative marginal tax rates are even needed for sufficiently low of the bargaining power.
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Citations
Lehmann, E., & Van der Linden, B. (2002). On the optimality of search matching equilibrium when workers are risk averse (ECON Working Papers 2002/23). https://hdl.handle.net/2078.5/34422