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Asset Based Unemployment Insurance

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  • Pontus Rendahl

Abstract

This paper studies a model of optimal redistribution policies in which agents face unemployment risk and in which savings may provide partial self-insurance. Moral hazard arises as job search effort is unobservable. The optimal redistribution policies provide new insights into how an unemployment insurance scheme should be designed: First, the unemployment insurance policy is recursive in an agent's wealth level, and thus independent of the duration of the unemployment spell. Second, the level of benefit payments is negatively related to the agent's asset position. The reason behind the latter result is twofold; in addition to the first-order insurance effect of wealth, an increase in non-labor income (wealth) amplifies the opportunity cost of employment and thus reduces the agent's incentive to search for a job. During unemployment the agent decumulates assets and the sequence of benefit payments is observationally increasing - a result that stands in sharp contrast with previous studies.

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Bibliographic Info

Paper provided by European University Institute in its series Economics Working Papers with number ECO2007/15.

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Date of creation: 2007
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Handle: RePEc:eui:euiwps:eco2007/15

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Keywords: Unemployment insurance; Moral hazard; Self-insurance; Decentralized taxes;

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References

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  1. Narayana R. Kocherlakota, 2005. "Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation," Econometrica, Econometric Society, vol. 73(5), pages 1587-1621, 09.
  2. W. Henry Chiu & Edi Karni, 1998. "Endogenous Adverse Selection and Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 106(4), pages 806-827, August.
  3. Mikhail Golosov & Narayana Kocherlakota & Aleh Tsyvinski, 2002. "Optimal Indirect and Capital Taxation," Levine's Working Paper Archive 391749000000000449, David K. Levine.
  4. Stefania Albanesi & Christopher Sleet, 2004. "Dynamic optimal taxation with private information," Discussion Paper / Institute for Empirical Macroeconomics 140, Federal Reserve Bank of Minneapolis.
  5. Glenn R. Hubbard & Jonathan Skinner & Stephen P. Zeldes, . "Precautionary Saving and Social Insurance," Rodney L. White Center for Financial Research Working Papers 3-95, Wharton School Rodney L. White Center for Financial Research.
  6. Steven Shavell & Laurence Weiss, 1978. "The Optimal Payment of Unemployment Insurance Benefits over Time," Cowles Foundation Discussion Papers 503, Cowles Foundation for Research in Economics, Yale University.
  7. Robert Shimer & Ivan Werning, 2008. "Liquidity and Insurance for the Unemployed," American Economic Review, American Economic Association, vol. 98(5), pages 1922-42, December.
  8. Oswald, Andrew J, 1986. "Unemployment Insurance and Labor Contracts under Asymmetric Information: Theory and Facts," American Economic Review, American Economic Association, vol. 76(3), pages 365-77, June.
  9. Bruce D. Meyer, 1988. "Unemployment Insurance And Unemployment Spells," NBER Working Papers 2546, National Bureau of Economic Research, Inc.
  10. Pavoni, Nicola, 2007. "On optimal unemployment compensation," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1612-1630, September.
  11. Hopenhayn, Hugo A & Nicolini, Juan Pablo, 1997. "Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 412-38, April.
  12. Gruber, Jonathan, 1997. "The Consumption Smoothing Benefits of Unemployment Insurance," American Economic Review, American Economic Association, vol. 87(1), pages 192-205, March.
  13. Rebecca M. Blank & David Card, 1989. "Recent Trends in Insured and Uninsured Unemployment: Is There an Explanation?," NBER Working Papers 2871, National Bureau of Economic Research, Inc.
  14. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  15. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January.
  16. Mikhail Golosov & Aleh Tsyvinski, 2006. "Designing Optimal Disability Insurance: A Case for Asset Testing," Journal of Political Economy, University of Chicago Press, vol. 114(2), pages 257-279, April.
  17. Moffitt, Robert, 1985. "Unemployment insurance and the distribution of unemployment spells," Journal of Econometrics, Elsevier, vol. 28(1), pages 85-101, April.
  18. Benveniste, L M & Scheinkman, J A, 1979. "On the Differentiability of the Value Function in Dynamic Models of Economics," Econometrica, Econometric Society, vol. 47(3), pages 727-32, May.
  19. McCall, John J, 1970. "Economics of Information and Job Search," The Quarterly Journal of Economics, MIT Press, vol. 84(1), pages 113-26, February.
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Cited by:
  1. Tatsiramos, Konstantinos & van Ours, Jan C, 2012. "Labor Market Effects of Unemployment Insurance Design," CEPR Discussion Papers 9196, C.E.P.R. Discussion Papers.
  2. Parsons, Donald O., 2014. "Job Displacement Insurance: An Overview," IZA Discussion Papers 8223, Institute for the Study of Labor (IZA).
  3. Moritz Kuhn & Sebastian Koehne, 2012. "Should unemployment insurance be asset-tested?," 2012 Meeting Papers 850, Society for Economic Dynamics.

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