Optimal Unemployment Insurance under Statistical Profiling (with S. Ruiz-Palazuelos; accepted, Economics Letters, 2026)
Abstract How should unemployment insurance (UI) be designed? We characterize the optimal contract when employability is statistically assessed at the beginning of a claim and progressively revised based on elapsed job search duration. In our setting, workers can manipulate future assessments through current search behavior, generating endogenous learning rents that must be compensated to sustain search effort. We show that these rents increase with unemployment duration and UI generosity, raising the relative attractiveness of search monitoring and assistance. Ignoring learning rents may therefore lead to insufficient search incentives, lower job-finding rates, and biased estimates of the returns to search-incentivizing programs.
Optimal Welfare-to-Work Programs with Worker Profiling [draft]
Abstract In welfare-to-work programs, profiling the job-finding probability of unemployed workers is essential in order to direct them to the most appropriate employment program. An optimal profiling strategy is achieved by integrating dynamic learning about a worker's skills within a principal-agent framework. The optimal welfare-to-work program is described for each type of worker, including referral to an employment program, unemployment benefits, wage taxes post-reemployment, and the accuracy and timing of profiling, which are tailored to the worker's expected skills and the generosity of the program. Implementing this optimal profiling strategy in the United States in 2014 would have generated average per-capita net present savings of $4,122.
Sustainable Social Security (with Lancia F., Russo A., and Worrall T.) [slides]
Abstract We examine the optimal design of a social security scheme in an economy with stochastic mortality, where younger generations can default on pension entitlements that were previously promised to older generations. The presence of stochastic mortality introduces cohort-specific uncertainty and social security plays a role in hedging longevity risk. We analyze the constrained efficient allocation chosen by a benevolent social planner that maximizes a weighted sum of the utility of current and future generations subject to limited enforcement constraints. We show that the resulting optimal social security scheme is linked to the mortality risk and has both flat-rate and contributory-related elements. The paper quantifies the risk borne by each generation during both the transition period and in the long run. Trends in replacement and contribution rates of pension systems in advanced economies during the period 1960-2020 resemble the optimal sustainable social security scheme.
Public Debt and Growth in a Democracy with Partisan Conflict (with Lancia F. and Russo A.) [slides]
Abstract We examine the strategic relationship between public investments and pork barrel spending, along with public debt, when spending-biased political parties alternate stochastically in power. The driving force of the model is the intergenerational conflict over the allocation and financing of the public budget. Successive generations of voters choose fiscal policies through repeated elections. We characterize the Markov-perfect equilibrium of the voting game and show that the party biased towards public investments exhibits less discipline compared to the party favoring pork barrel spending. The increased growth resulting from public investments raises the likelihood of indebtedness, ultimately restraining public spending in the long run. Our findings shed light on the coexistence of rising debt and political cycles observed in modern economies.
Optimal Climate Policy (with S. Ruiz-Palazuelos) [slides]
Abstract We examine the design and stability of climate coalitions in which countries jointly adopt a common carbon tax. The coalition board (the principal) collects tax revenues from the CO2 emissions of member countries (the agents) and rebates resources to guarantee them a given welfare level (promise-keeping constraint) as well as incentives to remain in the coalition (participation constraint). We find that (i) airborne carbon concentration is a sufficient statistic for the optimal carbon tax, and (ii) larger climate coalitions better internalize the negative externalities of carbon emissions but also generate stronger incentives to free-ride on non-member countries. When countries can not commit to remaining part of the coalition indefinitely, free-riding motives force the board to ensure membership via larger transfers. This hinders the financial sustainability of some possible coalitions, ultimately shrinking the set of attainable climate targets.