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Borrowing constraints, the cost of precautionary saving and unemployment insurance

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  • Thomas Crossley

    ()
    (Institute for Fiscal Studies and University of Cambridge)

  • Hamish Low

    ()
    (Institute for Fiscal Studies and Trinity College, Cambridge)

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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Bibliographic Info

Paper provided by Institute for Fiscal Studies in its series IFS Working Papers with number W05/02.

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Length: 62 pp.
Date of creation: Jan 2005
Date of revision:
Handle: RePEc:ifs:ifsewp:05/02

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  31. repec:fth:pennfi:69 is not listed on IDEAS
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Cited by:
  1. Robin Boadway, 2012. "Recent Advances in Optimal Income Taxation," Hacienda Pública Española, IEF, vol. 200(1), pages 15-39, March.
  2. Nicola Pavoni & Giovanni L. Violante, 2005. "Optimal welfare-to-work programs," Discussion Paper / Institute for Empirical Macroeconomics 143, Federal Reserve Bank of Minneapolis.
  3. Raj Chetty, 2005. "A General Formula for the Optimal Level of Social Insurance," NBER Working Papers 11386, National Bureau of Economic Research, Inc.
  4. Christoph Basten & Andreas Fagereng & Kjetil Telle, 2012. "Saving and portfolio allocation before and after job loss," Discussion Papers 672, Research Department of Statistics Norway.
  5. Rothstein, Jesse & Rouse, Cecilia Elena, 2011. "Constrained after college: Student loans and early-career occupational choices," Journal of Public Economics, Elsevier, vol. 95(1), pages 149-163.

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