Optimal unemployment insurance

We investigate the design of an optimal unemployment insurance program using an equilibrium search model calibrated using data from the reemployment bonus experiments. There are three main conclusions. First, insurance considerations suggest that the potential duration of UI benefits would be unlimited under an optimal program. Second, if the potential duration to benefits were unlimited, current replacement rates in the U.S. (about 0.5) would probably be about right. Third, the optimal replacement rate rises as the potential duration of benefits is increasingly limited, reaching I when the potential duration of benefits is limited to 32 weeks.