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Optimal unemployment insurance: Consumption versus expenditure

Author

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  • Campos, Rodolfo G.
  • Reggio, Iliana

Abstract

We study the optimal provision of unemployment insurance (UI) in a framework that distinguishes between consumption and expenditure. We derive a “sufficient statistics” formula for optimal UI that is expressed in terms of observable variables and can therefore be used in applied work. Recent research has shown that unemployed households pay less per unit of consumption than employed households. This finding has two counteracting effects on the optimal level of UI. On the one hand, consumption smoothing benefits identified from expenditure data overestimate the true marginal benefits of UI. On the other hand, UI benefits become more valuable because they buy more consumption when unemployed. In an optimal design, which effect dominates depends on the curvature of the utility function. We show that for relative risk aversion larger than one the first effect dominates, leading to lower levels of optimal UI.

Suggested Citation

  • Campos, Rodolfo G. & Reggio, Iliana, 2016. "Optimal unemployment insurance: Consumption versus expenditure," Labour Economics, Elsevier, vol. 38(C), pages 81-89.
  • Handle: RePEc:eee:labeco:v:38:y:2016:i:c:p:81-89
    DOI: 10.1016/j.labeco.2015.11.004
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    References listed on IDEAS

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    More about this item

    Keywords

    Consumption; Expenditure; Consumption-smoothing; Social insurance; Unemployment insurance; Sufficient statistics;

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • J68 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Public Policy

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