On the Optimal Timing of Benefits with Heterogeneous Workers and Human Capital Depreciation. NBER Working Paper 12230, National Bureau of Economic Research

this version is optimized for horizontal screen viewing click here to download the vertical version suitable for printing ∗Shimer’s research is supported by a grant from the National Science Foundation. Werning is grateful for the hospitality of Chicago and Harvard University during the time the first draft of this paper was written. Back 1 This paper studies the optimal timing of unemployment insurance subsidies in a McCall search model. Risk-averse workers sequentially sample random job opportunities. Our model distinguishes unemployment subsidies from con-sumption during unemployment by allowing workers to save and borrow freely. When the insurance agency faces a group of homogeneous workers solving sta-tionary search problems, the optimal subsidies are independent of unemploy-ment duration. In contrast, when workers are heterogeneous or when human capital depreciates during the spell, the optimal subsidy is no longer con-stant. We explore the main determinants of the shape of the optimal subsidy schedule, isolating forces for subsidies to optimally rise or fall with duration. Section 1: Introduction Back 2 1