I. Introduction, 434. — II. The description of the model, 435. — III. Determination of the short-run equilibrium, 439. — IV. Conclusion, 452.

A two-person, two-period general equilibrium model with uncertainty about second-period labor productivity is developed. The model is used to consider potential welfare (Pareto) gains from both a stylized unemployment insurance system and from a negative income tax system. Welfare gains are possible if individuals are sufficiently homogeneous. When both programs are operated simultaneously, complete insurance is always feasible but is optimal only if the labor supply curve is negatively sloped.