Author(s)
Daron Acemoglu, Robert Shimer

This paper constructs a tractable general equilibrium model of search with risk aversion. An increase in risk aversion reduces wages, unemployment, and investment. Unemployment insurance has the opposite effect: insured workers seek high‐wage jobs with high unemployment risk. An economy with risk‐neutral workers achieves maximal output without any unemployment insurance, but an economy with risk‐averse workers requires a positive level of unemployment insurance to maximize output. Therefore, moderate unemployment insurance not only improves risk sharing but also increases output.

Publication Type
Article
Journal
Journal of Political Economy
Volume
107
Issue Number
5
Pages
893-928
Keywords
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