Incentive-compatible unemployment reinsurance for the euro area

Alexander Karaivanov, Benoit Mojon, Luiz Awazu Pereira da Silva (), Albert Pierres Tejada and Robert M Townsend

No 1180, BIS Working Papers from Bank for International Settlements

Abstract: We model a reinsurance mechanism for the national unemployment insurance programs of euro area member states. The proposed risk-sharing scheme is designed to smooth country-level unemployment risk and expenditures around each country's median level, so that participation and contributions remain incentive-compatible at all times and there are no redistributionary transfers across countries. We show that, relative to the status quo, such scheme would have provided nearly perfect insurance of the euro area member states' unemployment expenditures risk in the aftermath of the 2009 sovereign debt crisis if allowed to borrow up to 2 percent of the euro area GDP. Limiting, or not allowing borrowing by the scheme would have still provided significant smoothing of surpluses and deficits in the national unemployment insurance programs over the period 2000-2019.

Keywords: unemployment insurance; risk sharing; reinsurance; euro area; fiscal policy; mechanism design; limited commitment (search for similar items in EconPapers)
JEL-codes: E62 F32 J65 (search for similar items in EconPapers)
Date: 2024-04
New Economics Papers: this item is included in nep-eec, nep-lab and nep-opm
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Related works:
Working Paper: Incentive-Compatible Unemployment Reinsurance for the Euro Area (2024)
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