Job search costs and incentives

  • Andriy Zapechelnyuk
  • Ro’i ZultanEmail author
Research Article


We demonstrate that policies aimed at reducing frictional unemployment may lead to the opposite results. In a labor market with long-term wage contracts and moral hazard, any such policy reduces employees’ opportunity costs of staying on a job. As employees are less worried about losing their job, a smaller share of employees is willing to exert effort, leading to a lower average productivity. Consequently, firms create fewer vacancies, resulting in lower employment and decreased welfare.


Job search Moral hazard Labor market Unemployment insurance 

JEL Classification

D82 J64 J65 



This paper was conceived during the activities of the Game Theory and Evolution group organized by Sergiu Hart and Avi Shmida and hosted by the Institute for Advanced Studies and the Center for Rationality at the Hebrew University of Jerusalem. We are thankful to the group members, in particular to its organizers and the host institutions. We also thank Tomer Blumkin, Leif Danziger, Tymofiy Mylovanov, and Eyal Winter for valuable comments.

Compliance with ethical standards

Conflict of interest

The authors declare that they have no conflict of interest.


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Copyright information

© Society for the Advancement of Economic Theory 2019

Authors and Affiliations

  1. 1.School of Economics and FinanceUniversity of St AndrewsSt AndrewsUK
  2. 2.Department of EconomicsBen-Gurion University of the NegevBeer-ShevaIsrael

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