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The authors study the optimal provision of Unemployment Insurance (UI) over the business cycle. They consider an equilibrium Mortensen-Pissarides search and matching model with risk-averse workers and aggregate shocks to labor productivity. Both the vacancy creation decisions of firms and the search e ort decisions of workers respond endogenously to aggregate shocks as well as to changes in UI policy. They characterize the optimal history-dependent UI policy. They find that, all else equal, the optimal benefit is decreasing in current productivity and decreasing in current unemployment. Optimal benefits are therefore lowest when current productivity is high and current unemployment is high. The optimal path of benefits reacts non-monotonically to a productivity shock.
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