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The government designs an unemployment policy that maximizes the agent's expected utility. If the agent accepts a job, then the wage is taxed by (w),
The government designs an unemployment policy that maximizes the agent's expected utility. If the agent accepts a job, then the wage is taxed by (w), so an employed agent consumes w (w). Notice that the tax can vary with wage. If the agent remains unemployed (either because the offer was rejected or the agent did not receive an offer), then the agent consumes unemployment benefit b 0. The policy has to satisfy the following budget constraint
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