DP14116 Social Insurance, Information Revelation, and Lack of Commitment
We consider optimal public provision of unemployment insurance when government's ability to commit is imperfect. Unemployed persons privately observe arrivals of job opportunities and choose probabilities of communicating this information to the government. Imperfect commitment implies that full information revelation is generally suboptimal. We define a notion of the social value of information and show that, due to the incentive constraints, it is a convex function of the information revealed. In the optimum each person is provided with an incentive to either reveal his private information fully or not reveal any of it, but the allocation of these incentives may be stochastic. In dynamic economies unemployed persons who enter a period with higher continuation utilities reveal their private information with lower probabilities. The optimal contract can be decentralized by a joint system of unemployment and disability benefits in a way that resembles how these systems are used in practice in developed countries.