A quantitative theory of time-consistent unemployment insurance

Yun Pei and Zoe Xie

Journal of Monetary Economics, 2021, vol. 117, issue C, 848-870

Abstract: During recessions, the U.S. government substantially increases the duration of unemployment insurance (UI) benefits through multiple extensions. Benefit extensions increase UI coverage and lead to higher average consumption of unemployed workers, but the expectation of an extension may reduce unemployed worker’s job search incentives and lead to higher future unemployment. We show that benefit extensions in recessions arise naturally when the government forgoes prior commitment and makes discretionary UI policies. We endogenize a time-consistent non-commitment UI policy in a stochastic equilibrium search model, and use the model to quantitatively evaluate the benefit extensions implemented during the Great Recession. Switching to the (Ramsey) commitment policy would reduce the unemployment by 2.9 percentage points with small welfare gains.

Keywords: Time-consistent policy; Unemployment insurance; Search and matching (search for similar items in EconPapers)
JEL-codes: E61 H21 J64 J65 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Working Paper: A Quantitative Theory of Time-Consistent Unemployment Insurance (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:117:y:2021:i:c:p:848-870

DOI: 10.1016/j.jmoneco.2020.06.003

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