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Can the Unemployed Borrow? Implications for Public Insurance

J. Carter Braxton, Kyle Herkenhoff () and Gordon Phillips ()

No 27026, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We show that unemployed individuals maintain significant access to credit. Following job loss, the unconstrained borrow, while the constrained default and delever. Both defaulters and borrowers are using credit to smooth consumption. We quantitatively show that long-term credit relationships and credit-registries allow the unemployed to partially offset income losses using credit. We estimate the model and find that the optimal provision of public insurance is unambiguously lower with greater credit access. Using a utilitarian welfare criterion, the optimal steady-state policy is to lower the replacement rate of public insurance from the current US policy of 41.2% to 38.3%. Moreover, lowering the replacement rate to 38.3% yields welfare gains to the majority of workers along the transition path.

JEL-codes: D14 E21 E24 G51 J64 (search for similar items in EconPapers)
Date: 2020-04
New Economics Papers: this item is included in nep-ias, nep-lab and nep-mac
Note: CF IFM ME POL
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Working Paper: Can the Unemployed Borrow? Implications for Public Insurance (2019) Downloads
Working Paper: Can the Unemployed Borrow? Implications for Public Insurance (2018) Downloads
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