Liquidity and Insurance for the Unemployed

Robert Shimer and Iván Werning

American Economic Review, 2008, vol. 98, issue 5, 1922-42

Abstract: We study unemployment insurance for workers who sequentially sample job opportunities. We focus on the optimal timing of benefits and the desirability of allowing borrowing and saving. When workers have constant absolute risk aversion, a simple policy is optimal: a constant benefit during unemployment, a constant tax during employment, and free access to a riskless asset. With constant relative risk aversion, optimal policy involves nearly constant benefits; more elaborate policies offer minuscule welfare gains. We highlight two distinct policy roles: ensuring workers have sufficient liquidity to smooth their consumption; and providing unemployment subsidies to insure against uncertain spell duration. (JEL J65)

JEL-codes: D81 J64 J65 (search for similar items in EconPapers)
Date: 2008
Note: DOI: 10.1257/aer.98.5.1922
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Citations: View citations in EconPapers (133)

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Related works:
Working Paper: Liquidity and insurance for the unemployed (2005)
Working Paper: Liquidity and Insurance for the Unemployed (2005)
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