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Borrowing constraints, the cost of precautionary saving and unemployment insurance

  • Thomas Crossley

    ()

    (Institute for Fiscal Studies and Institute for Fiscal Studies, University of Essex)

  • Hamish Low

    ()

    (Institute for Fiscal Studies and Trinity College, Cambridge)

Job losers exhibit significant heterogeneity in wealth holdings and in the marginal propensity to consume transitory income. We consider potential sources of this heterogeneity, whether (some of) the unemployed face borrowing constraints, and the implications of this heterogeneity for unemployment insurance. We show theoretically how the optimal benefit can depend significantly on borrowing constraints, and on other (non- precautionary) savings motives. We report empirical evidence that (i) a quarter of job losers cannot borrow for current consumption, (ii) this constraint is binding for a much smaller fraction, and (iii) that \'excess sensitivity\' is not limited to the constrained.

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Paper provided by Institute for Fiscal Studies in its series IFS Working Papers with number W05/02.

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Length: 62 pp.
Date of creation: Jan 2005
Date of revision:
Handle: RePEc:ifs:ifsewp:05/02
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