Working Paper: CEPR ID: DP9389
Authors: Nicola Pavoni; Ofer Setty; Giovanni L. Violante
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.
Keywords: moral hazard; recursive contracts; search; welfare program; work
JEL Codes: D82; H21; J24; J64; J65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| job search assistance + mandatory work (J68) | employment outcomes (J68) |
| threat of mandatory work (J22) | search incentives (O31) |
| program structure (Y20) | employment outcomes (J68) |
| program design (C88) | job search effectiveness (J68) |
| human capital depreciation (J24) | employment prospects (J68) |