Should Unemployment Insurance Be Asset-Tested?

Sebastian Koehne and Moritz Kuhn

No 7488, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We study asset-tested unemployment insurance in an incomplete markets model with moral hazard during job search. Asset testing has two counteracting effects on welfare. On the one hand, it improves consumption insurance by introducing state contingent transfers to agents most in need. On the other hand, it worsens the moral hazard problem, since workers have a reduced incentive to save and fewer private resources are used for consumption smoothing during unemployment. Our results show that in a realistically calibrated model of the U.S. economy the two effects nearly offset each other – the optimal rate of asset-testing is approximately zero. This finding is robust to several alternative specifications of the model, including a case with heterogeneous time-discount factors. We conclude that the current U.S. unemployment insurance system is approximately optimal.

Keywords: incomplete markets; asset-testing; unemployment insurance; consumption and saving (search for similar items in EconPapers)
JEL-codes: E21 E24 J65 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2013-07
New Economics Papers: this item is included in nep-cta, nep-dge, nep-ias, nep-lab and nep-mac
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Published - published in: Review of Economic Dynamics, 2015, 18 (3), 575-592

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Related works:
Journal Article: Should unemployment insurance be asset-tested? (2015)
Working Paper: Should Unemployment Insurance be Asset-Tested (2013)
Working Paper: Should unemployment insurance be asset-tested? (2012)
Working Paper: Should unemployment insurance be asset-tested? (2012)
Working Paper: Should unemployment insurance be asset-tested? (2012)
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