Moral Hazard versus Liquidity and Optimal Unemployment Insurance

Raj Chetty

Journal of Political Economy, 2008, vol. 116, issue 2, 173-234

Abstract: This paper presents new evidence on why unemployment insurance (UI) benefits affect search behavior and develops a simple method of calculating the welfare gains from UI using this evidence. I show that 60 percent of the increase in unemployment durations caused by UI benefits is due to a "liquidity effect" rather than distortions on marginal incentives to search ("moral hazard") by combining two empirical strategies. First, I find that increases in benefits have much larger effects on durations for liquidity-constrained households. Second, lump-sum severance payments increase durations substantially among constrained households. I derive a formula for the optimal benefit level that depends only on the reduced-form liquidity and moral hazard elasticities. The formula implies that the optimal UI benefit level exceeds 50 percent of the wage. The "exact identification" approach to welfare analysis proposed here yields robust optimal policy results because it does not require structural estimation of primitives. (c) 2008 by The University of Chicago. All rights reserved.

Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (647)

Downloads: (external link)
http://dx.doi.org/10.1086/588585 link to full text (text/html)
Access to full text is restricted to subscribers.

Related works:
Journal Article: Erratum: Moral Hazard versus Liquidity and Optimal Unemployment Insurance (2008)
Working Paper: Moral Hazard versus Liquidity and Optimal Unemployment Insurance (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ucp:jpolec:v:116:y:2008:i:2:p:173-234

Access Statistics for this article

More articles in Journal of Political Economy from University of Chicago Press
Bibliographic data for series maintained by Journals Division ().