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Liquidity and Insurance for the Unemployed

Listed author(s):
  • Robert Shimer
  • Ivan Werning

We study unemployment insurance for workers who sequentially sample job opportunities. We focus on the optimal timing of benefits and the desirability of allowing borrowing and saving. When workers have constant absolute risk aversion, a simple policy is optimal: a constant benefit during unemployment, a constant tax during employment, and free access to a riskless asset. With constant relative risk aversion, optimal policy involves nearly constant benefits; more elaborate policies offer minuscule welfare gains. We highlight two distinct policy roles: ensuring workers have sufficient liquidity to smooth their consumption; and providing unemployment subsidies to insure against uncertain spell duration. (JEL J65)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.98.5.1922
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 98 (2008)
Issue (Month): 5 (December)
Pages: 1922-1942

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Handle: RePEc:aea:aecrev:v:98:y:2008:i:5:p:1922-42
Note: DOI: 10.1257/aer.98.5.1922
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  3. Wang, Cheng & Williamson, Stephen D., 2002. "Moral hazard, optimal unemployment insurance, and experience rating," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1337-1371, October.
  4. Robert Shimer & Iván Werning, 2006. "On the Optimal Timing of Benefits with Heterogeneous Workers and Human Capital Depreciation," NBER Working Papers 12230, National Bureau of Economic Research, Inc.
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  10. Allen, Franklin, 1985. "Repeated principal-agent relationships with lending and borrowing," Economics Letters, Elsevier, vol. 17(1-2), pages 27-31.
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  18. Gary D. Hansen & Ayse Imrohoroglu, 1990. "The Role of Unemployment Insurance in an Economy with Liquidity Constraints and Moral Hazard," UCLA Economics Working Papers 583, UCLA Department of Economics.
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  24. Shavell, Steven & Weiss, Laurence, 1979. "The Optimal Payment of Unemployment Insurance Benefits over Time," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1347-1362, December.
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