How might unemployment benefits create a moral hazard problem?
What will be an ideal response?
Moral hazard occurs when a principal cannot observe the actions of an agent. When moral hazard is present, someone's actions are their private information and affect the payoffs of others. In the case of unemployment benefits, moral hazard occurs because how hard someone is trying to find a job or what possibilities he is turning down is private information. Generous unemployment benefits imply weaker incentives to look for work and the possibility of a longer duration of unemployment.
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