The primary purpose of unemployment insurance (U.I.) is no doubt to insure individuals against loss of wage income. However, U.I. is commonly believed to adversely affect job search behavior and to lengthen the duration of unemployment. With these issues in mind, this paper asks how U.I. benefits ought to be paid out over time. Specifically, the paper uses a theoretical model to determine characteristics of the time sequence of benefits that maximizes the expected utility of the unemployed, given that they act in a self-interested way and given the total size of the U.I. budget.

I. Introduction, 541.—II. The model, 542.—III. Moral hazard when care is not observed by the insurer, 544.—IV. Moral hazard when care is observed by the insurer, 550.—Appendix, 561.

The primary purpose of unemployment insurance (U.I.) is no doubt to insure individuals against loss of wage income. However, U.I. is commonly believed to adversely affect job search behavior and to lengthen the duration of unemployment. With these issues in mind, this paper asks how U.I. benefits ought to be paid out over time. Specifically, the paper uses a theoretical model to determine characteristics of the time sequence of benefits that maximizes the expected utility of the unemployed, given that they act in a self-interested way and given the total size of the U.I. budget.

This paper examines the use of fines and imprisonment to deter individuals from engaging in harmful activities. These sanctions are analyzed separately as well as together, first for identical risk-neutral individuals and then for two groups of risk-neutral individuals who differ by wealth. When fines are used alone and individuals are identical, the optimal fine and probability of apprehension are such that there is some underdeterrence. If individuals differ by wealth, then the optimal fine for the high wealth group exceeds the fine for the low wealth group. When imprisonment is used alone and individuals are identical, the optimal imprisonment term and probability may be such that there is either underdeterrence or overdeterrence. If individuals differ by wealth, the optimal imprisonment term for the high wealth group may be longer or shorter than the term for the low wealth group. When fines and imprisonment are used together, it is desirable to use the fine to its maximum feasible extent before possibly supplementing it with an imprisonment term. The effects of risk aversion on these results are also discussed.