Should unemployment insurance be asset-tested?

Sebastian Koehne and Moritz Kuhn

MPRA Paper from University Library of Munich, Germany

Abstract: A series of empirical studies has documented that job search behavior depends on the financial situation of the unemployed. Starting from this observation, we ask how unemployment insurance policy should take the individual financial situation into account. We use a quantitative model with a realistically calibrated unemployment insurance system, individual consumption-saving decision and moral hazard during job search to answer this question. We find that the optimal policy provides unemployment benefits that increase with individual assets. By implicitly raising interest rates, asset-increasing benefits encourage self-insurance, which facilitates consumption smoothing during unemployment but does not exacerbate moral hazard for job search. Asset-increasing benefits also have desirable properties from a dynamic perspective, because they emulate key features of the dynamics of constrained efficient allocations. We find welfare gains from introducing asset-increasing benets that are substantial and amount to 1.5% of consumption when comparing steady states and 0.8% of consumption when taking transition costs into account. More generous replacement rates or benefits targeted to asset-poor households, by contrast, have a negative effect on welfare.

Keywords: unemployment insurance; asset testing; incomplete markets; consumption and saving (search for similar items in EconPapers)
JEL-codes: E21 H21 J65 (search for similar items in EconPapers)
Date: 2012-02-27
New Economics Papers: this item is included in nep-dge, nep-ias and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://mpra.ub.uni-muenchen.de/37843/3/MPRA_paper_37843.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/39147/2/MPRA_paper_39147.pdf revised version (application/pdf)

Related works:
Journal Article: Should unemployment insurance be asset-tested? (2015)
Working Paper: Should Unemployment Insurance be Asset-Tested (2013)
Working Paper: Should Unemployment Insurance Be Asset-Tested? (2013)
Working Paper: Should unemployment insurance be asset-tested? (2012)
Working Paper: Should unemployment insurance be asset-tested? (2012)
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