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...

A model of self-enforcing stochastic monitoring with investment and production is developed. The optimal contract leads to debt-like and equity-like claims on the firm that are held by symmetrically informed outside investors and rationalizes the separation of these claims in order to...