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When might unemployment insurance matter?

10 Nov 2003

The presence of credit constraints introduces an interaction between the investment decision and the consumption decision and so the choice of investment depends on the consumption level in the investment period. [...] This is the moral hazard which is typically cited as the “cost” of unemployment insurance and which is the subject of the large empirical literature discussed in the introduction. [...] The first term in the marginal cost is the (forgone) wage, again valued at a share weighted average of the marginal utilities in the periods in which it is received (note that because of the mandatory pension contributions, a fraction of current earnings is received in retirement). [...] Our aim in this subsection, however, is to show the implications that the costs of saving and 18 the inability to borrow have for consumption smoothing, investment and the marginal benefit of unemployment insurance. [...] In each panel, the solid line represents the case where the agent is credit constrained,14 and the line comprised of long dashes represents the case where the agent can borrow freely.
economics economy insurance finance business economic equilibrium investments labour retirement unemployment unemployment insurance unemployment benefits microeconomics pension precautionary savings loan market macro economics illiquid market liquidity consumption smoothing liquid assets smooth consumption

Authors

Crossley, Thomas F

Pages
49
Published in
Canada

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