Public Economics Lectures Part 1: Introduction

Calibrating the Model
Gruber calibrates Baily’s model using his and Meyer’s estimates:
γ ∆c
c
b
γ(β 1
+ ∗
β 2
≈
ε 1−e,b
e
w ) = ε 1−e,b
e
Solving for the optimal replacement rate yields:
b ∗
w = ε 1−e,b/e
β 2
( 1 γ ) − β 1
β 2
Plugging in ε 1−e,b = .43 as in Gruber (1997) and e = .95 (5%
unemployment rate) yields:
b ∗
w = −(.43/.95 · 1
.28 γ ) − (−.24)
.28
Public Economics Lectures () Part 6: Social Insurance 63 / 207