Can the Unemployed Borrow? Implications for Public Insurance

J. Carter Braxton, Gordon Phillips and Kyle Herkenhoff
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J. Carter Braxton: University of Minnesota

No 564, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: Do the unemployed have access to credit markets? Yes. Do the unemployed borrow? Yes. We link administrative earnings records with credit reports and show that individuals maintain significant access to credit following job loss. Unconstrained job losers borrow, while constrained job losers default and delever. Both default and borrowing allow job losers to boost consumption, and they pay an interest rate premium to do so, i.e. the credit market acts as a limited private unemployment insurance market. We show theoretically that default costs allow credit markets to serve as a market for private unemployment insurance despite adverse selection and asymmetric information about future job loss. We then ask, given the degree of private unemployment insurance household's have in the data, what is the optimal provision of public unemployment insurance? We find that the optimal provision of public insurance is unambiguously lower as credit access expands. The median voter in our simulated economy would prefer to have the replacement rate lowered from the current US policy of 45% to 35%. However, a utilitarian planner would actually prefer to raise UI relative to current US levels, even in the presence of well-developed credit markets.

Date: 2018
New Economics Papers: this item is included in nep-dge and nep-ias
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Citations: View citations in EconPapers (19)

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Related works:
Working Paper: Can the Unemployed Borrow? Implications for Public Insurance (2020)
Working Paper: Can the Unemployed Borrow? Implications for Public Insurance (2019)
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