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Optimal Unemployment Insurance: Consumption versus Expenditure

Rodolfo Campos and Iliana Reggio

UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía

Abstract: We study the optimal provision of unemployment insurance (UI) in a framework that distinguishes between consumption and expenditure. We derive a "sufficient statistics" formula for optimal UI that is expressed terms of observable variables and can therefore be used in applied work. Recent research has shown that unemployed households pay less per unit of consumption than employed households. This finding has two counteracting effects on the optimal level of UI. On the one hand, consumption smoothing benefits identified from expenditure data overestimate the true marginal benefits of UI. On the other hand, UI benefits become more valuable because they buy more consumption when unemployed. In an optimal design, which effect dominates depends on the curvature of the utility function. We show that for relative risk aversion larger than one the first effect dominates, leading to lower levels of optimal UI.

Keywords: expenditure; consumption-smoothing; consumption; social; insurance; unemployment; insurance (search for similar items in EconPapers)
JEL-codes: D11 J64 J65 J68 (search for similar items in EconPapers)
Date: 2015-02-01
New Economics Papers: this item is included in nep-ias, nep-pbe and nep-upt
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Journal Article: Optimal unemployment insurance: Consumption versus expenditure (2016) Downloads
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