Abstract
It is shown that the inefficiencies created by the soft budget constraint enjoyed by enterprises in Eastern Europe and elsewhere will continue so long as governments are unable credibly to threaten not to bail out loss makers. The institution of a suitable social safety net can strengthen commitment to a hard budget constraint. The burden on the social safety net can be reduced by the (endogenous) development of financial markets.[JEL D78, H32, J65, P26]
It is shown that the inefficiencies created by the soft budget constraint enjoyed by enterprises in Eastern Europe and elsewhere will continue so long as governments are unable credibly to threaten not to bail out loss makers. The institution of a suitable social safety net can strengthen commitment to a hard budget constraint. The burden on the social safety net can be reduced by the (endogenous) development of financial markets.[JEL D78, H32, J65, P26]
kornai (1980,1986) used the term “soft budget constraint” to describe the system in socialist economies whereby enterprises were accustomed to receiving various forms of subsidies more or less automatically and to having any operating profits largely expropriated. If enterprises are required to meet quantitative targets and prices are administered, it is necessary to let the budget constraint soften and to regard the financial system as little more than an accounting device. In the absence of a “hard” budget constraint, allowing the controlling interests of enterprises more flexibility may encourage rent-seeking behavior and a moral hazard problem will arise. Half measures that grant managers power without responsibility may drag the economy further away from an efficient allocation and make it more vulnerable to disturbances. Competition can function in an effective and desirable way only when enterprises have the means and incentives to pursue their individual interests, and when the institutions of financial discipline are in place, such as the absence of systemic subsidies and capricious taxation, the separation of lenders from borrowers, a mechanism to remove unsatisfactory management, and the ultimate threat of bankruptcy.
Hence, all reform proposals and programs for Eastern Europe have insisted on the hardening of budget constraints, even at the cost of many plant closings and the laying off of many workers. Nevertheless, some enterprises and groups seem to continue enjoying a privileged position. A similar process was observed in the West during the 1980s as governments attempted with difficulty to restructure loss-making public enterprises and to deny subsidies to firms in difficulties, which had previously relied on their size and locally dominant position to guarantee their continued existence. It is easy to find examples even from the recent past of industries that have been saved from bankruptcy by an injection of public funds, and of firms and sectors that survive in their present form because of long-term government support.1
The pervasiveness of soft budget constraints suggests that there are similar mechanisms in both East and West that serve to induce government intervention, even when the government would not want people to anticipate its reactions. Specifically, this paper starts with a formalization of the widely held intuition that a policy not to subsidize loss-making enterprises may lack credibility. The government’s intention to let firms fend for themselves may be undermined once hardship threatens, and the intensity and frequency of such threats will be increased by habitual government intervention, because enterprises will foresee this backsliding and therefore act less prudently. Although the effects of a soft budget constraint on the firm’s behavior were examined in some detail by Kornai and Weibull (1983) and Goldfeld and Cluandt (1988, 1990, 1991), only Schaffer (1989) has looked at the game from the government’s perspective, and he concentrated on incentives to fulfill quantitative targets.
Such commitment problems are well known in macroeconomics following Kydland and Prescott (1977) and have also been addressed, for instance, in the literature on taxation policy (Persson and Tabellini (1990) provide a good synthesis), which in some respects is the converse of subsidization policy. In the terminology of game theory, policies are required to belong to subgame perfect, or at least sequential, equilibria, in which agents base their decisions at each stage on rational expectations concerning the subsequent evolution of the equilibrium. Hence, no player can systematically surprise another.
One means of generating commitment to policies that have short-run costs is to build a reputation for toughness in a repeated game by following a retaliatory “trigger” strategy or by mimicking a player who lacks a commitment problem; even a player for whom toughness is very costly may wish to invest in a demonstration that it is following a rule such as “tit-for-tat,” or to imitate the behavior of a genuinely tough player. In the context of hardening the budget constraint, one may want to close a few prominent loss-making enterprises “pour encourager les autres.” Reputational equilibria, however, generally must presume uncertainty about the government’s preferences or the termination of the game, and tend not to be robust to slight modifications to the informational assumptions. Models in which reputations can be created often have multiple equilibria, several of which may seem intuitively plausible. Therefore, after a history of concessions, a mere announcement of a new policy of toughness without institutional changes may not be granted much credence, and defending a reputation for not subsidizing loss makers (or not generating surprise inflation, or not taxing committed capital) relies on a degree of coordination of expectations that is implausible in a complex economy (see Rogoff (1987) and Persson and Tabellini (1990) for a summary of these criticisms). A reputational mechanism alone, as proposed, for instance, by Schaffer (1989), seems unlikely to be a reliable and general remedy for government’s tendency to bail out loss makers.
A more concrete and unambiguous device is therefore desirable to reinforce the credibility of the hard budget constraint. In this paper it will be shown that the introduction of a suitable social safety net will do the job: once enterprises see that the government has provided a cushion against unemployment, they will recognize that the government has less motive to cover their losses, and they will plan accordingly. No uncertainty about preferences, actions, or the duration of the game is required, nor does government have to arrange to make reneging costly. While in practice the institution of a social safety net and the taxes needed to fund it may create their own inefficiencies, so may the taxes that finance subsidies; here, an additional argument in favor of the provision of adequate unemployment benefits is isolated.
Moreover, the imposition of a hard budget constraint on enterprises will have important implications for the demand for financial instruments and thus for monetary conditions in a reforming economy. As subsidies or low-cost loans are eliminated, demand for precautionary balances and other forms of insurance will increase. As a consequence, the demands on the social safety net will be reduced.
In the next section a model of a simple repeated game is laid out, which captures much of the policy dilemma facing government and the reaction of firms. In Section II the model is extended to allow government to establish a social safety net, and some inferences concerning the relationship between financial markets and the need for a social safety net are drawn. Extensions are discussed in Section III. Section IV offers conclusions.
I. Subsidies, Moral Hazard, and Time Inconsistency
The model of this section simplifies the production technology used in Goldfeld and Quandt (1988) but makes the interaction between the firm and government explicit. An effective lobbying “technology” will not simply be posited; rather, the mechanism whereby firms can extract benefits from government is the first subject of analysis.
The economy has two sectors, one atomistic with constant returns to scale technology, and the other represented by a single firm. There is just one factor of production. The factor will at times be referred to as “labor” and its unit cost as the “wage rate.” The total potential supply of the factor is fixed at x, but the available supply equals x less those who are temporarily out of the factor market. The game is repeated over an indefinite number of periods. At the start of each period, the firm writes contracts to hire its desired level of inputs, which is always below the total available supply. The remainder of the available factor supply is employed in the atomistic sector. Technology in the atomistic sector exhibits steady constant returns to scale, which determines the nonvarying wage rate, w.2 At the end of the period, the firm decides whether it will have to reduce employment; all factors made redundant are excluded from the factor market for one period. Perhaps workers need time to search for new employment, to relocate, and to be retrained. The stipulation that factors need one period to be reallocated is the only technological link between periods.
Behavior of Firms
The firm is a risk-neutral, profit-maximizing price taker. No financial instruments are available to the firm and there is unlimited liability. Borrowing or reserves are unavailable. At the start of each period the firm commits to a level of input, x, to use in its production function, f(x), where
If the firm can meet its costs, the owners of the firm enjoy the realized operating profit and continue to operate the firm. If operating profits are negative, the owners are assumed to be able to meet their immediate costs, but in the absence of government intervention, the firm closes down. Profits are negative if the realization of
that occurs with probability Φ1(u), where Φ1 is the cumulative distribution function (c.d.f.) of
since (σ2/2) is the expected value of
Let x1 be the value that satisfies equation (4), and let u1 be the corresponding value of u. The last term on the right-hand side of (4) must be positive if the firm wishes to operate at all.5 The managers of the firm are concerned not only to maximize expected profits this period, but also to preserve their rights to the stream of future profits. Employment of an extra unit of the input not only raises revenue and costs, w, but also increases the probability of losses being incurred. Therefore, management is more cautious and employs less of the factor than would a myopic firm.
A firm that anticipates a bailout if it makes losses has a different expected value because it does not have to worry about the lower end of the distribution of operating profits. Expected profits net of subsidies are increased, and the firm is certain to continue operating. Suppose, in particular, that the firm knows that all losses will automatically be covered. Then its expected value to be maximized will be
It can be shown that if
The first-order condition for the maximum of equation (6), fulfilled by x2, can be expressed as 7
Since
Obtaining the right to a subsidy is analogous to receiving a “put” option with a striking price at Π = 0; an extra unit of the input increases the variance of operating profits and therefore increases the value of the put. Notice that the value of this put ensures that expected profits. V2 when a subsidy is foreseen are always positive, whereas V1 could well be negative, in which case the firm would prefer not to begin operations. Indeed, a firm that is sure of receiving a subsidy in case of need has a positive private value even if expected operating profits are negative at any level of input use.
Government’s Reaction
Turning now to the behavior of government, it will be assumed that the government is risk neutral, that it has no purely distributional preferences, that it has the same rate of time discounting as private agents, and that revenue can be raised without creating distortions.8 The government acts as a benign dictator in maximizing the social welfare function, one component of which is the operating profits of the firm. There is scope for policy because if the firm closes its inputs are unemployed for one period as they are reallocated.9 The firm is not concerned about this potential negative externality, which government is motivated to correct. At the same time, the government is unable or unwilling to control the firm’s production decisions directly but can only react to their effects. Reputation building and trigger strategies are ignored; the government’s decision to provide subsidies is taken independently each period.
It is useful to distinguish between the welfare effect of reallocating the potential supply of the factor between the two sectors and that of any reduction in available supply due to unemployment. At the start of some period, t, before the realization of
Note that the wage rate, ω, and the firm’s choice of input level, x are constant across periods, although the Latter does depend on which government policy is anticipated.
With a certain probability, in any period τ, the realization of
At the start of t total discounted expected welfare is
Consider now the government’s choices at the end of the period once the realization,
If the government saves the firm from closing, realized welfare will be just
since no unemployment occurs.11 Equations (10) and (11) embody the government’s dilemma: after a firm has chosen its inputs, and if losses are made, it is certainly better to subsidize than to let the firm shut down and suffer unemployment. If subsidies are the only policy instrument, the government cannot resist calls to bail out loss makers of any size. But once the firm realizes that it is protected from closure, it will take greater risks and increase its demand for inputs from x1 to x2. Notice also that, by assumption, even if the incumbent loss maker is forced to close, a new entrant will be attracted by the prospect of subsidies and recreate the dilemma for government.12
It may he helpful to look at the extensive form representation of the game shown in Figure 1. At the start of each round, the firm chooses x1 or x2. “Nature” chooses the realization of
Extensive Form When Social Safety Net Is Absent
Citation: IMF Staff Papers 1992, 002; 10.5089/9781451947106.024.A004
Note: See text for definitions of variables.The first-best allocation is not achieved in this equilibrium because of the unemployment externality and the moral hazard problem. If the government could dictate the firm’s use of inputs. ex ante at time t the government would choose x and the sequence,
which is the familiar condition that marginal revenue product should equal marginal cost. It is apparent that
If the government must commit itself to not saving loss makers (so
This expression is maximized by choosing x=x** , according to
The two last terms on the right-hand side of equation (14) can be shown by an argument similar to the one applied to equation (4) to be nonnegative in the relevant range, and so
The firm choosing x1 and sometimes failing is not necessarily superior to the firm choosing x2 and being supported, but the case can obtain when the addition to expected operating profits from choosing x1 over x2 outweighs the potential losses from unemployment. Then the problem considered here is most interesting: the government will want agents to believe that it will not subsidize loss makers, but then feels compelled to do so and undermines its own credibility. The relevant condition is
or
Notice that by the definition of x1 and Φ1, both sides of the inequality must be positive.
II. Commitment and the Social Safety Net
If the government wants firms to believe that they must rely on themselves alone, a mechanism must be devised that makes the government willing to let firms fail. In particular, it is suggested that a form of social safety net or national insurance will be effective and practical.
Effect of a Social Safety Net
Suppose that the government arranges in advance to provide benefits to all unemployed workers equal to the difference between the going wage and the reservation wage. When x workers are to become unemployed next period, so that each produces an amount, v, lower than w, the present value of these benefits is
The extensive form of the game with the new net payoffs is shown in Figure 2. The firm’s payoffs under different strategies and the probabilities of losses being made are unaffected. Owners risk having to cover operating losses and then losing control of the firm if there are no bailouts, so they would choose to hire an amount x1 of the input; if the government is known to support loss makers. the firm will expand by hiring x2. However, because compensation is now automatic, the government does not have to worry about preventing an additional welfare loss through unemployment once operating losses have been incurred. Subsidizing loss makers to preserve jobs has the same end effect on welfare as allowing unemployment to rise, which is in itself costly but is offset by social safety net benefits. Taking it as given that the latter course is marginally preferable, the government never provides a bailout. The social safety net transforms the cost of unemployment
Extensive Form When Social Safety Net Is Operational
Citation: IMF Staff Papers 1992, 002; 10.5089/9781451947106.024.A004
Note: Notation defined as in Figure 1.The demands placed on the social safety net depend on a readily observable quantity, the level of unemployment, rather than on preferences, individuals’ information sets, or the market conditions and technological parameters faced by the firm. Therefore, this mechanism is likely to be more robust than a purely reputational equilibrium (were that available). Nor are direct controls on input levels or the monitoring of effort required; although in this simple model direct controls can achieve the first-best allocation, in practice state planning of the production process has often led to informational inefficiencies, excessive rigidity, and enlarged scope for rent seeking.
Note also that with x1 rather than x1 workers vulnerable to being laid off and a lower probability of losses occurring, the social safety net has to bear less extreme levels of unemployment less often, than if the firm had remained too large; the anticipation by the firm of the hard budget constraint makes it easier to enforce. This is not to say that the social safety net will be cheap. In the bad state, safety net payouts could be much larger than realized losses, so the immediate cost of keeping people employed could be much less than the sum of social security benefits. Furthermore, firms with positive private and social value will be shutting down because of the liquidity constraint, which, on average, costs society
It would in principle be superior to conduct a policy of subsidizing firms with realized losses if and only if they had chosen to hire x1, so that “well-behaved” firms are not forced to close and unemployment is avoided altogether. However, such a strategy is only feasible when the government has enough information to be a perfect social planner, and it is only credible when the social safety net operates whenever employment differs from x1.14
Role of Financial Markets
In addition to the unemployment externality, the availability of more or less complete asset markets will become important once the budget constraint becomes hard. Subsidies to cover losses may be interpreted in this model as an ex post response to the negative effect of the liquidity constraint. Yet, if a firm anticipates a bailout, it not only modifies its production decisions but also lacks any incentive to do something about that constraint. Given that cheap government financing is always available, there is no need for the firm to purchase insurance or otherwise protect its existence.
When the threat to let loss makers close is made credible, a firm with positive expected profits has the means and the motivation to acquire financial instruments that will help it through hard times.
Suppose, to take an extreme case, that the firm can enter into a contingent contract to pay an amount. q, in return for complete compensation for any shortfall of profits below q; that is, the firm can buy a suitable put option. If this contract is priced as a “fair bet,” q is defined implicitly by
where
If such a well-tailored put is unavailable, the firm may still be motivated to insure itself partially, for example, by holding precautionary cash balances or negotiating lines of credit with banks. The imposition of a hard budget constraint is thus likely to be accompanied by an increase in the demand for liquid assets by firms.
Once financial markets have developed in response to the firm’s desire to insure itself, the cost of providing the social safety net will greatly diminish. Indeed, if the firm acquires perfect insurance through a contingent contract, as sketched above, unemployment will never arise (at least, not in this stationary model). The first-best level of employment is achieved and the social safety net will never be called upon—but the institution must still be operational to ensure that everyone knows in advance that government subsidies will not be forthcoming. If a mechanism is in place to give credibility to the government’s threat, the response of firms and the development of private institutions may eliminate occasions for the mechanism to be employed and the threat carried out.
III. Extensions
The simple model considered in the previous two sections abstracts from many of the factors that influence relations between firms and government. Here, several extensions and qualifications will be discussed.
Objectives of Firms and Government
The assumption that the firm seeks to maximize profits and is risk neutral may be questioned, but from the government’s point of view the problem is similar if the firm aims at maximizing revenue, subject to an expected profit constraint. Profit maximization is a convenient and familiar objective; perhaps the firm is controlled by management that maximizes true profit so as to increase its own benefits while announcing the minimum rate of return necessary to satisfy the owners.
Typically, risk aversion on the part of the owners and controllers of the firm reduces output (see Goldfeld and Quandt (1991)), and, if the government is known not to provide bailouts, risk aversion may lead to an undersupply of entrepreneurship. The limitations on liability that are common in market economies can be interpreted as a relatively simple way of ensuring that idiosyncratic risks get diversified, thus encouraging entrepreneurial activity, but they can also generate a moral hazard problem, similar in kind to that posed by the possibility of bailouts. In this model limited liability legislation that permits the occasional removal of the owners of a firm in exchange for restricting their losses results in employment being set between the levels implicit in equations (4) and (8). On a more political level, since a subsidy to cover losses smoothes income, risk-averse owners may be especially assiduous in pursuing government assistance.
The government’s objectives could also be refined. The traditional argument for the provision of a social safety net is based on fairness: since people typically have one job each but are not individually responsible for the fate of their employer, the cost of an adverse shock ought to be spread between those directly affected and the rest of society. In utilitarian terminology, aggregate utility is maximized by equalizing marginal utility across individuals, so, other things being equal, income should be smoothed. Alternatively, there are grounds for presuming that a government that must face the electorate at periodic intervals will tend to have more difficulty committing itself than will a Pigovian autocrat, if only because the electoral cycle tends to shorten the government’s time horizon, and will be more prone to providing bailouts. In this paper, however, it has been shown that there is a credibility problem even in the best of political circumstances and when income distribution does not matter to government.
Lobbying Mechanisms
In practice, firms do not wait for subsidies but lobby actively for protection and support. A rational government would not, however, be persuaded by loud “whining” alone, and so attention has been given to the process whereby political pressure is generated. In an electoral context, firms might be able to increase their chances of being rescued by promising to make contributions to campaigns. Those potentially hurt by the imposition of a hard budget constraint may also make a credible threat to retaliate, perhaps through civil disobedience; or, as suggested by some evidence and casual observation, certain firms are protected by their very size from being allowed to fail. It is easy to imagine economic and political forces that might induce a government to be disproportionately concerned about large closures—for example, when larger groups can retaliate more effectively against the imposition of a hard budget constraint. If the probability of rescue was proportional to size, firms would then have a further motive to increase employment (see Hillman, Katz, and Rosenberg (1987) for a discussion of the implications for factor demands of such a policy reaction function). However, a well-funded social safety net would strengthen the government’s resistance to demands for special treatment even from large interest groups.
Relation to Other Policies
Just as government may feel impelled to rescue loss-making firms, so it may be tempted to introduce ex post supplementary taxes on profit makers. Taxes on those who have been exceptionally successful have much political appeal, especially if they are called “windfall gain taxes,” “contributions” or “loans.” Ultimately, if the government cannot commit itself to either not taxing away profits or not covering losses, all incentives for the firm will be lost. Goldfeld and Quandt (1991) present a model with a fixed tax rate on positive operating profits and subsidies obtained through lobbying.
Generally, one may want to consider the political economy of spending, taxation, and transfers together. Most immediately, if revenue can only be obtained by distortionary means, all government spending becomes less beneficial. The provision of subsidies to loss makers will be discouraged by any loss of welfare incurred in financing the transfers, while the maintenance of a social safety net will be more costly, the greater the inefficiencies generated by the counterpart taxation. In practice, these offsetting losses, which can be determined only if the details of the relevant tax system are known, will need to be added to the balance in choosing between bailouts and unemployment insurance.
More indirectly, unemployment compensation may be too generous if it discourages mobility and the expenditure of effort on looking for work, and the construction of any social safety net will have to take into account the risk of moral hazard on the part of factors.15 In the notation used here, ν could fall as the generosity of social safety net provisions increases because workers remain unemployed longer. Indeed, if ν falls far enough, subsidizing loss makers could again become optimal at very high levels of compensation.
On a macroeconomic level, the subsidy to keep a firm operating after losses have been incurred may be financed by money creation; a transfer to one party is achieved by diminishing the real balances of others. With many firms in the economy, some of which are always in difficulties, sustained inflation will result. Because the benefits provided by the social safety net are not just intrasocietal transfers, their financing must take the form of paying a real premium in the good states, and so this inflation bias can be avoided. Then, once a hard budget constraint has been established, it has been suggested there may be a structural increase in the demand for liquid assets, which would be deflationary.
IV. Conclusions
Government declarations that firms must be fully responsible for their actions and that bailouts will not occur are often heard. And the imposition of a hard budget constraint is considered necessary for price signals to be meaningful and for resources to be induced to move toward an efficient allocation. Yet, the discretion that a sovereign government enjoys can make pressure to support loss-making industries irresistible. Once the threat of costly unemployment becomes actual, government will not, and rationally should not, be impassive. In anticipation of bailouts, firms will tend to become too large and to undertake projects with too large a risk of being unprofitable. Even a firm with negative expected operating profits may continue operating if the government feels compelled to support it rather than face unemployment.
The most practical mechanism to strengthen credibility is the institution of an adequate social safety net. Provision of benefits to the unemployed is motivated not just by a sense of fairness or the desire to even out marginal utilities of income, but by the need to stiffen the government’s resolve when faced with demands for subsidies. The transfers provided by the social safety net may be large, and the main net benefit, namely, the effect on firms’ behavior of hardening the budget constraint, will be indirect.
Financial markets are likely to remain underdeveloped in an economy with pervasive softness of budget constraints because they are not needed when income is smoothed through grants and concessionary government loans. The hardening of firms’ budget constraints will provide incentives for the introduction of new financial instruments and strategies as firms (and individuals) learn to guard themselves against periods of low income or illiquidity. At the same time, the more developed are financial markets, the less strain will be placed on the social safety net. Put another way, in the model considered in this paper there are two distortions, namely, the possibility of costly unemployment and a liquidity constraint. With the single instrument of subsidies, the ill effects of these distortions can be mitigated only at the cost of creating a moral hazard problem. Allowing for a second instrument, the social safety net, lends credibility but is still second best because it is imperfectly targeted. However, incentives are provided that should lead to a resolution of most of the liquidity constraint problem and reduce the cost of using the available instruments. The general implications are that a social safety net must be established if budget constraints are to be made truly hard, and that the early encouragement of financial markets will be both more successful and more important, once firms can be sure that a government rescue will not be forthcoming.
REFERENCES
Commission of the European Communities, Statistical Annex, European Economy, No. 46 (December 1990). pp. 217–91.
Goldfeld, Stephen M., and Richard E. Quandt, “Budget Constraints, Bailouts, and the Firm Under Central Planning,” Journal of Comparative Economics, Vol. 12 (December 1988). pp. 502–20.
Daniel C. Hardy. an Economist in the Central Banking Department, was an Economist in the European Department when this work was completed. He holds a Ph.D. from Princeton University.
The author would like to thank Manuel Guitin, Jan van Houten, Ashok Lahiri, Dubravko Mihaljek, and Richard Quandt for perceptive comments.
Holzmann (1991) provides evidence of the extent to which loss-making enterprises in Eastern Europe were supported by the state; during the 1980s—a period of putative reforms in some countries—budgetary subsidies alone were typically almost 10 percent of gross domestic product (GDP). Budgetary support by the European Communities (EC) for the agricultural sector averaged 0.6 percent of members’ GDP during the 1980s (Commission of the European Communities (1990)).
Decreasing returns to scale in the aggregate production function of the atomistic sector could be introduced with little effect on the qualitative results.
Time subscripts have been dropped whenever ambiguity is not thereby created.
There is no conceptual difficulty in introducing more explicit dynamics. For instance, if exp
The term Φ’ must be positive because it describes a distribution function; ρ is the positive discount factor; and V1 is positive if the firm is worth operating. Assume that the term in square brackets in equation (4) is negative, which implies that
It can be verified that for any arbitrary parameter, s
The last term on the right above is the normal c.d.f. for
Note that
In this model a tax on wage income is nondistortionary because the labor supply is fixed.
The model does not rely in any very important way on the specification of the costs associated with the firm being left to fail.
The (shadow) reservation wage, V, reflects whatever cost or benefit arises from being idle.
Since by assumption the government does not care about distribution and taxes are nondistortionary, the transfer from the rest of society to the loss maker does not itself enter into the welfare calculation.
If, contrary to the assumption here, the firm is not replaced. if it ever has to shut, the expression
An analogy can be made with schemes that make deviation from a pre- announced monetary policy automatically costly to the government itself, perhaps through its effect on the government’s portfolio of nominal and indexed bonds (see Persson, Persson, and Svensson (1987)).
In the model in this paper the government could also achieve the first-best solution by taxing input use by the firm and always subsidizing loss makers. However, such an approach would create new distortions if the firm’s technology is known imperfectly or if taxes have to be uniform across industries.
However, since in the model here the government is indifferent about the distribution of income, there is no reason why the unemployed themselves should receive the compensation.