In this paper, we show that in a dynamic general equilibrium economy, the presence of moral hazard need not induce large cuts in optimal unemployment insurance benefits. We find that it takes a quite large proportion of "shirkers" to bend the generosity of the optimal unemployment insurance...

In this paper, we show that in a dynamic general equilibrium economy, the presence of moral hazard need not induce large cuts in optimal unemployment insurance benefits when agents are asked to vote on these benefits. We find that it takes a quite large proportion of "shirkers" to bend the...