We consider the problem of optimal unemployment insurance (UI) in a repeated moral hazard framework. Unlike existing literature, unemployed individuals can secretly participate in a hidden labor market. This extension modifies the standard problem in three dimensions. First, it imposes an...

Since the probability of finding a job is affected not only by individual effort but also by the aggregate state of the economy, designing unemployment insurance schemes conditional on the business cycles could be valuable. This paper answers a fundamental question related to this issue: How...