Optimal Unemployment Insurance and Experience Rating.

In the presence of asymmetric information, adding a public unemployment insurance to labor contracts is potentially Pareto improving. Unfortunately, most successful mechanisms are manipulable by coalitions. This leads us to design coalition incentive compatible unemployment insurance systems. Their welfare effect depends on which coalitions are feasible. Whenever firm unemployment insurance coalitions may form, one ends up with an impossibility result: as contracts are made coalition proof, they no longer Pareto dominate firm-worker contracts. However, if only firm-worker coalitions are feasible, the public unemployment insurance is strictly Pareto improving, even though it cannot implement the welfare levels that would be reached if no coalitions were feasible at all. Copyright 1988 by The editors of the Scandinavian Journal of Economics.