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Can the Unemployed Borrow? Implications for Public Insurance

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Listed:
  • J. Carter Braxton

    (University of Minnesota)

  • Gordon Phillips

    (Dartmouth College)

  • Kyle Herkenhoff

    (University of Minnesota)

Abstract

We show that unemployed individuals maintain significant access to credit. Following job loss, the unconstrained borrow, while the constrained default and delever. Both defaulters and borrowers are using credit to smooth consumption. We quantitatively show that credit-registries and long-term credit relationships allow the unemployed to partially offset income losses using credit, despite various forms of adverse selection. We estimate the model and find that the optimal provision of public insurance is unambiguously lower as credit access expands. The median individual in our simulated economy would gain both in steady-state as well as during the transition if the income replacement rate from public insurance programs is lowered from the current US policy of 41.2% to 39.8%.

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Handle: RePEc:red:sed019:323
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File URL: https://economicdynamics.org/meetpapers/2019/paper_323.pdf
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