Can the Unemployed Borrow? Implications for Public Insurance

J. Carter Braxton, Kyle Herkenhoff and Gordon M. Phillips

Journal of Political Economy, 2024, vol. 132, issue 9, 3025 - 3076

Abstract: We empirically establish that unemployed individuals maintain significant access to credit and that upon a layoff, the unconstrained borrow while the constrained default and delever. Motivated by these findings, we develop a theory of credit lines and labor income risk to analyze optimal transfers to the unemployed. Since credit lines offer fixed interest rates and limits, credit lines are unresponsive to layoffs and provide greater consumption insurance relative to when debt is repriced period by period. At US levels of credit lines, the government can optimally reduce transfers to the unemployed, whereas this is not true when debt is counterfactually repriced period by period.

Date: 2024
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