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Efficient unemployment insurance and the cost of borrowing

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  • Pollak, Andreas

Abstract

This paper presents a simple formula relating the efficiency of the level of unemployment benefits to the cost of saving in an infinite-horizon economy in which households can borrow up to their natural borrowing limit. I extend Baily’s (1978) result showing that the benefits of unemployment insurance can be directly related to a measure of households’ impatience. This is possible because in the type of heterogeneous agent models under consideration, buffer-stock savings, and thus the expected consumption drop during unemployment, are determined by the prevailing interest rate.

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Bibliographic Info

Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 116 (2012)
Issue (Month): 2 ()
Pages: 136-138

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Handle: RePEc:eee:ecolet:v:116:y:2012:i:2:p:136-138

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Web page: http://www.elsevier.com/locate/ecolet

Related research

Keywords: Unemployment insurance; Welfare; Heterogeneous agents;

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  1. Raj Chetty, 2008. "Erratum: Moral Hazard versus Liquidity and Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 116(6), pages 1197-1197, December.
  2. Baily, Martin Neil, 1978. "Some aspects of optimal unemployment insurance," Journal of Public Economics, Elsevier, vol. 10(3), pages 379-402, December.
  3. Carroll, Christopher D, 1997. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 1-55, February.
  4. Chetty, Raj, 2008. "Moral Hazard versus Liquidity and Optimal Unemployment Insurance," Scholarly Articles 9751256, Harvard University Department of Economics.
  5. Gruber, Jonathan, 1997. "The Consumption Smoothing Benefits of Unemployment Insurance," American Economic Review, American Economic Association, vol. 87(1), pages 192-205, March.
  6. Robert Shimer & Iván Werning, 2007. "Reservation Wages and Unemployment Insurance," The Quarterly Journal of Economics, MIT Press, vol. 122(3), pages 1145-1185, 08.
  7. Rasmus Lentz, 2009. "Optimal Unemployment Insurance in an Estimated Job Search Model with Savings," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(1), pages 37-57, January.
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