Unemployment insurance and capital accumulation

In this paper, I examine a model economy with production, search. and unemployment insurance. The introduction or capital into the economy of Wang and Williamson (J. Monetary Econorn. 49(7)(2001)1337) generates the result that optimal replacement ratios are always zero. The result arises from the decline in aggregate activity caused by unemployment insurance: both capital and labor inputs to production fall when benefits rise. Unlike most of the literature. I compute explicitly the cost of the transition path: agents are made better off by switching to a steady state with 110 Unemployment insurance. but the welfare gain is approximately cut in half. Only the very poor and unemployed suffer welfare losses along the transition path. I then briefly investigate the implications of negative replacement ratios. (C) 2004 Elsevier B.V. All rights reserved.