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Risk-based selection in unemployment insurance: evidence and Implications

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  • Landais, Camille
  • Nekoei, Arash
  • Nilsson, Peter
  • Seim, David
  • Spinnewijn, Johannes

Abstract

This paper studies whether adverse selection can rationalize a universal mandate for unemployment insurance (UI). Building on a unique feature of the unemployment policy in Sweden, where workers can opt for supplemental UI coverage above a minimum mandate, we provide the first direct evidence for adverse selection in UI and derive its implications for UI design. We find that the unemployment risk is more than twice as high for workers who buy supplemental coverage. Exploiting variation in risk and prices, we show how 25-30% of this correlation is driven by risk-based selection, with the remainder driven by moral hazard. Due to the moral hazard and despite the adverse selection we find that mandating the supplemental coverage to individuals with low willingness-to-pay would be sub-optimal. We show under which conditions a design leaving choice to workers would dominate a UI system with a single mandate. In this design, using a subsidy for supplemental coverage is optimal and complementary to the use of a minimum mandate.

Suggested Citation

  • Landais, Camille & Nekoei, Arash & Nilsson, Peter & Seim, David & Spinnewijn, Johannes, 2020. "Risk-based selection in unemployment insurance: evidence and Implications," LSE Research Online Documents on Economics 108448, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:108448
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    References listed on IDEAS

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    Cited by:

    1. Jason S. Anquandah & Leonid V. Bogachev, 2019. "Optimal Stopping and Utility in a Simple Model of Unemployment Insurance," Papers 1902.06175, arXiv.org, revised Sep 2019.
    2. Lombardi, Stefano, 2019. "Threat effects of monitoring and unemployment insurance sanctions: evidence from two reforms," Working Paper Series 2019:22, IFAU - Institute for Evaluation of Labour Market and Education Policy.

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    More about this item

    Keywords

    Adverse Selection; Unemployment Insurance; Mandate; Subsidy;
    All these keywords.

    JEL classification:

    • R14 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Land Use Patterns
    • J01 - Labor and Demographic Economics - - General - - - Labor Economics: General

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