Unemployed but optimistic: optimal insurance design with biased beliefs

Johannes Spinnewijn

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

Abstract: This paper analyzes how biased beliefs about employment prospects affect the optimal design of unemployment insurance. Empirically, I find that the unemployed greatly overestimate how quickly they will find work. As a consequence, they would search too little for work, save too little for unemployment and deplete their savings too rapidly when unemployed. I analyze the use of the "sufficient-statistics" formula to characterize the optimal unemployment policy when beliefs are biased and revisit the desirability of providing liquidity to the unemployed. I also find that the optimal unemployment policy may involve increasing benefits during the unemployment spell.

Keywords: biased belief; unemployment; optimal insurance; moral hazard (search for similar items in EconPapers)
JEL-codes: D83 G22 H30 (search for similar items in EconPapers)
Date: 2015-02
New Economics Papers: this item is included in nep-ias, nep-mkt and nep-pbe
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Citations: View citations in EconPapers (128)

Published in Journal of the European Economic Association, February, 2015, 13(1), pp. 130-167. ISSN: 1542-4766

Downloads: (external link)
http://eprints.lse.ac.uk/59165/ Open access version. (application/pdf)

Related works:
Journal Article: UNEMPLOYED BUT OPTIMISTIC: OPTIMAL INSURANCE DESIGN WITH BIASED BELIEFS (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:59165

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