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On existence of private unemployment insurance with advance information on future job losses

Author

Listed:
  • Piotr Denderski

    (University of Leicester School of Business)

  • Christian A. Stoltenberg

    (University of Amsterdam)

Abstract

We study the existence of a profitable unemployment insurance market in a dynamic economy with adverse selection rooting in information on future job losses. The new feature of the model is that the insurer and workers interact repeatedly. Repeated interactions make it possible to threaten workers with exclusion from future insurance benefits after a default on insurance premia. With exclusion, not only the insurance against the fundamental risk, but also against future bad news about job losses matters. In contrast to conventional wisdom, we find that private unemployment insurance in the US can be profitable for a relatively short exclusion length of one year. To stimulate the emergence of a private unemployment insurance market, policy makers can facilitate the creation of a registry that archives past defaults on insurance premia.

Suggested Citation

  • Piotr Denderski & Christian A. Stoltenberg, 2021. "On existence of private unemployment insurance with advance information on future job losses," Tinbergen Institute Discussion Papers 21-052/VI, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20210052
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    References listed on IDEAS

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    More about this item

    Keywords

    Advance information; subjective expectations; adverse selection; unemployment insurance; repeated interactions; dynamic contracts;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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