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Borrowing Constraints, the Cost of Precautionary Saving, and Unemployment Insurance

  • Thomas F. Crossley
  • Hamish W. Low

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 McMaster University in its series Quantitative Studies in Economics and Population Research Reports with number 391.

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Length: 65 pages
Date of creation: Dec 2004
Date of revision:
Handle: RePEc:mcm:qseprr:391
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  1. Rendón, Silvio, 2002. "Job search and asset accumulation under borrowing constraints," UC3M Working papers. Economics we025219, Universidad Carlos III de Madrid. Departamento de Economía.
  2. Hans G. Bloemen & Elena G. F. Stancanelli, 2003. "Financial Wealth, Consumption Smoothing, and Income Shocks due to Job Loss," Documents de Travail de l'OFCE 2003-09, Observatoire Francais des Conjonctures Economiques (OFCE).
  3. Hansen, Gary D & Imrohoroglu, Ayse, 1992. "The Role of Unemployment Insurance in an Economy with Liquidity Constraints and Moral Hazard," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 118-42, February.
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  7. Meyer, Bruce D, 1990. "Unemployment Insurance and Unemployment Spells," Econometrica, Econometric Society, vol. 58(4), pages 757-82, July.
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  14. Chetty, Raj, 2006. "A general formula for the optimal level of social insurance," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 1879-1901, November.
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  26. Tullio Jappelli, 1990. "Who is Credit Constrained in the U. S. Economy?," The Quarterly Journal of Economics, Oxford University Press, vol. 105(1), pages 219-234.
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  28. Susan E. Mayer & Christopher Jencks, 1989. "Poverty and the Distribution of Material Hardship," Journal of Human Resources, University of Wisconsin Press, vol. 24(1), pages 88-114.
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