Efficient unemployment insurance and the cost of borrowing
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.
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References listed on IDEAS
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- Baily, Martin Neil, 1978. "Some aspects of optimal unemployment insurance," Journal of Public Economics, Elsevier, vol. 10(3), pages 379-402, December.
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