Revise and Resubmit, Journal of Economic Dynamics and Control
This paper investigates the welfare impact of reemployment bonuses in a dynamic job search model. Reemployment bonuses, monetary incentives offered to workers who quickly get reemployed, may mitigate the moral hazard in unemployment insurance (UI) while preserving consumption smoothing. I first derive a sufficient statistic formula for the welfare impact of reemployment bonuses. The formula combines two channels, a consumption-reallocation channel from the frontloading of income within employment and a fiscal-externality channel from the UI spending that faster reemployment saves. Evaluating the formula using U.S. data yields a positive welfare gain, driven mainly by the fiscal externality. Furthermore, an extended quantitative model suggests that (i) the optimal bonus equals about 19% of the wage and raises welfare modestly for a labor-market entrant, (ii) reemployment bonuses and UI benefits are complements, in the sense that the welfare value of adding a bonus rises with the generosity of UI, and (iii) workers no longer gain from any positive bonus once firms extract roughly one fifth of the payment through lower wages.
JEL Classification: H20, J64, J65
Keywords: Reemployment bonus; Sufficient statistic approach; Unemployment insurance; Consumption smoothing; Moral hazard