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Should unemployment insurance be asset-tested?

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  • Koehne, Sebastian
  • Kuhn, Moritz

Abstract

A series of empirical studies has documented that job search behavior depends on the financial situation of the unemployed. Starting from this observation, we ask how unemployment insurance policy should take the individual financial situation into account. We use a quantitative model with a realistically calibrated unemployment insurance system, individual consumption-saving decision and moral hazard during job search to answer this question. We find that the optimal policy provides unemployment benefits that increase with individual assets. By implicitly raising interest rates, asset-increasing benefits encourage self-insurance, which facilitates consumption smoothing during unemployment but does not exacerbate moral hazard for job search. Asset-increasing benefits also have desirable properties from a dynamic perspective, because they emulate key features of the dynamics of constrained efficient allocations. We find welfare gains from introducing asset-increasing benets that are substantial and amount to 1.5% of consumption when comparing steady states and 0.8% of consumption when taking transition costs into account. More generous replacement rates or benefits targeted to asset-poor households, by contrast, have a negative effect on welfare.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 36973.

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Date of creation: 27 Feb 2012
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Handle: RePEc:pra:mprapa:36973

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Keywords: unemployment insurance; asset testing; incomplete markets; consumption and saving;

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  23. Ana M. Aizcorbe & Arthur B. Kennickell & Kevin B. Moore, 2003. "Recent changes in U.S. family finances: evidence from the 1998 and 2001 Survey of Consumer Finances," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jan, pages 1-32.
  24. Lawrance, Emily C, 1991. "Poverty and the Rate of Time Preference: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 54-77, February.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Unemployment insurance only for the rich
    by Economic Logician in Economic Logic on 2012-03-15 15:20:00

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