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Borrowing constraints, the cost of precautionary saving and unemployment insurance

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  • Thomas Crossley

    ()

  • Hamish Low

    ()

Abstract

Job losers exhibit significant heterogeneity in wealth holdings and in the marginal propensity to consume transitory income. We consider potential sources of this heterogeneity, whether (some of) the unemployed face borrowing constraints, and the implications of this heterogeneity for unemployment insurance. We show theoretically how the optimal benefit can depend significantly on borrowing constraints, and on other (non- precautionary) savings motives. We report empirical evidence that (i) a quarter of job losers cannot borrow for current consumption, (ii) this constraint is binding for a much smaller fraction, and (iii) that \'excess sensitivity\' is not limited to the constrained.

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File URL: http://hdl.handle.net/10.1007/s10797-011-9172-1
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Bibliographic Info

Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 18 (2011)
Issue (Month): 6 (December)
Pages: 658-687

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Handle: RePEc:kap:itaxpf:v:18:y:2011:i:6:p:658-687

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Web page: http://www.springerlink.com/link.asp?id=102915

Related research

Keywords: Unemployment insurance; Savings; Credit constraints; Life-cycle; Consumption; J65; H53; D91;

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References

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  1. Rasmus Lentz, 2003. "Optimal Unemployment Insurance in an Estimated Job Search Model with Savings," CAM Working Papers 2004-10, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
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Citations

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Cited by:
  1. Raj Chetty, 2005. "A General Formula for the Optimal Level of Social Insurance," NBER Working Papers 11386, National Bureau of Economic Research, Inc.
  2. Christoph Basten & Andreas Fagereng & Kjetil Telle, 2012. "Saving and Portfolio Allocation Before and After Job Loss," KOF Working papers 12-298, KOF Swiss Economic Institute, ETH Zurich.
  3. Rothstein, Jesse & Rouse, Cecilia Elena, 2011. "Constrained after college: Student loans and early-career occupational choices," Journal of Public Economics, Elsevier, vol. 95(1-2), pages 149-163, February.
  4. Nicola Pavoni & Giovanni L. Violante, 2005. "Optimal welfare-to-work programs," Discussion Paper / Institute for Empirical Macroeconomics 143, Federal Reserve Bank of Minneapolis.

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