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Hassler, John
Mora, José V. Rodriguez
Storesletten, Kjetil
Zilibotti, Fabrizio
Year of Publication: 
Series/Report no.: 
CESifo Working Paper 791
This paper presents a tractable dynamic general equilibrium model that can explain cross-country empirical regularities in geographical mobility, unemployment and labor market institutions. Rational agents vote over unemployment insurance (UI), taking the dynamic distortionary e.ects of insurance on the performance of the labor market into consideration. Agents with higher cost of moving, i.e., more attached to their current location, prefer more generous UI. The key assumption is that an agent's attachment to a location increases the longer she has resided there. UI reduces the incentive for labor mobility and increases, therefore, the fraction of attached agents and the political support for UI. The main result is that this self-reinforcing mechanism can give rise to multiple steady-states one European steady-state featuring high unemployment, low geographical mobility and high unemployment insurance, and one American steadystate featuring low unemployment, high mobility and low unemployment insurance.
geographical mobility
political equilibrium
unemployment insurance
Document Type: 
Working Paper

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