Title

Search and Work in Optimal Welfare Programs

Author(s)

Nicola Pavoni Nicola Pavoni (Università Bocconi)

Ofer Setty Ofer Setty (Tel Aviv University)

Giovanni L. Violante Giovanni Violante (New York University)

Abstract

Some existing welfare programs ("work-first") require participants to work in exchange for benefits. Others ("job search-first") emphasize private job-search and provide assistance in finding and retaining a durable employment. This paper studies the optimal design of welfare programs when (i) the principal/government is unable to observe the agent's effort, but can assist the agent's job search and can mandate the agent to work, and (ii) agents' skills depreciate during unemployment. In the optimal welfare program, assisted search is implemented between an initial spell of private search (unemployment insurance) and a final spell of pure income support where search effort is not elicited. To be effective, job-search assistance requires large reemployment subsidies. The optimal program features compulsory work activities for low levels of program's generosity (i.e., its promised utility or available budget). The threat of mandatory work acts like a punishment that facilitates the provision of search incentives without compromising consumption smoothing too much.

Creation Date

2012-12

Section URL ID

Paper Number

2012-1

URL

http://violante.mycpanel.princeton.edu/Workingpapers/PSV_searchwork_final.pdf

File Function

Jel

D82, H21, J24, J64, J65

Keyword(s)

Moral Hazard, Recursive Contracts, Search, Welfare Program, Work

Suppress

false

Series

13