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Incentive-compatible unemployment reinsurance for the euro area

Author

Listed:
  • Karaivanov, Alexander
  • Mojon, Benoit
  • Pereira da Silva, Luiz
  • Tejada, Albert Pierres
  • Townsend, Robert M.

Abstract

We model a reinsurance mechanism for the national unemployment insurance programs of euro area member states. The proposed risk-sharing scheme is designed to smooth country-level unemployment risk and expenditures around each country’s median level, so that participation and contributions remain incentive-compatible at all times, and there is no permanent redistribution across countries. We show that, relative to the status quo, such a scheme could have provided nearly perfect insurance of the euro area states’ unemployment expenditure risk in the aftermath of the 2009 sovereign debt crisis if allowed to borrow up to 2.5 percent of the euro area GDP. Limiting or not allowing borrowing by the scheme would have still provided significant smoothing of surpluses and deficits in the national unemployment insurance programs over the period 2000–2019.

Suggested Citation

  • Karaivanov, Alexander & Mojon, Benoit & Pereira da Silva, Luiz & Tejada, Albert Pierres & Townsend, Robert M., 2026. "Incentive-compatible unemployment reinsurance for the euro area," European Economic Review, Elsevier, vol. 186(C).
    • Handle: RePEc:eee:eecrev:v:186:y:2026:i:c:s0014292126000693
    DOI: 10.1016/j.euroecorev.2026.105325
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    Keywords

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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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