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Efficient unemployment insurance and the cost of borrowing

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  • Pollak, Andreas

Abstract

This paper presents a simple formula relating the efficiency of the level of unemployment benefits to the cost of saving in an infinite-horizon economy in which households can borrow up to their natural borrowing limit. I extend Baily’s (1978) result showing that the benefits of unemployment insurance can be directly related to a measure of households’ impatience. This is possible because in the type of heterogeneous agent models under consideration, buffer-stock savings, and thus the expected consumption drop during unemployment, are determined by the prevailing interest rate.

Suggested Citation

  • Pollak, Andreas, 2012. "Efficient unemployment insurance and the cost of borrowing," Economics Letters, Elsevier, vol. 116(2), pages 136-138.
    • Handle: RePEc:eee:ecolet:v:116:y:2012:i:2:p:136-138
    DOI: 10.1016/j.econlet.2012.02.001
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    References listed on IDEAS

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    1. Christopher D. Carroll, 1997. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(1), pages 1-55.
    2. Rasmus Lentz, 2009. "Optimal Unemployment Insurance in an Estimated Job Search Model with Savings," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(1), pages 37-57, January.
    3. Raj Chetty, 2008. "Moral Hazard versus Liquidity and Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 173-234, April.
    4. Gruber, Jonathan, 1997. "The Consumption Smoothing Benefits of Unemployment Insurance," American Economic Review, American Economic Association, vol. 87(1), pages 192-205, March.
    5. Baily, Martin Neil, 1978. "Some aspects of optimal unemployment insurance," Journal of Public Economics, Elsevier, vol. 10(3), pages 379-402, December.
    6. Raj Chetty, 2008. "Moral Hazard versus Liquidity and Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 173-234, April.
    7. Robert Shimer & Iván Werning, 2007. "Reservation Wages and Unemployment Insurance," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(3), pages 1145-1185.
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    Keywords

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    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers

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