Risk-based selection in unemployment insurance: evidence and Implications

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

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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 percent 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 suboptimal. 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.

Keywords: adverse Selection; unemployment Insurance; mandate; subsidy; 679704; 716485 (search for similar items in EconPapers)
JEL-codes: D82 G22 J65 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2021-04-01
New Economics Papers: this item is included in nep-ias
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Published in American Economic Review, 1, April, 2021, 111(4), pp. 1315 - 1355. ISSN: 0002-8282

Downloads: (external link)
http://eprints.lse.ac.uk/108448/ Open access version. (application/pdf)

Related works:
Journal Article: Risk-Based Selection in Unemployment Insurance: Evidence and Implications (2021)
Working Paper: Risk-based selection in unemployment insurance: evidence and implications (2017)
Working Paper: Risk-based Selection in Unemployment Insurance: Evidence and Implications (2017)
Working Paper: Risk-based Selection in Unemployment Insurance: Evidence and Implications (2017)
Working Paper: Risk-based selection in unemployment insurance: evidence and implications (2017)
Working Paper: Risk-based selection in unemployment insurance: evidence and implications (2017)
Working Paper: Risk-based selection and unemployment insurance: evidence and implications (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:108448

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