Working paper

Time-consistent unemployment insurance

Sumudu Kankanamge, and Thomas Weitzenblum

Abstract

This paper examines the optimal time-consistent unemployment insurance policy in a search economy with incomplete markets. In a context of repeated choice without a commitment device, we show that the optimal replacement rate depends on how frequently in time the policy can be revised. The exact relation is dependent on the political process: if the utilitarian welfare criterion is used, the optimal rate is higher the shorter the choice periodicity. Self-insurance reduces the need for the public scheme but mostly because the policy cannot be changed often enough. The comparison with an economy where a commitment device is assumed shows that the commitment rate is close to time-consistent rates with very long choice periodicities.

JEL codes

  • C63: Computational Techniques • Simulation Modeling
  • E61: Policy Objectives • Policy Designs and Consistency • Policy Coordination
  • J65: Unemployment Insurance • Severance Pay • Plant Closings

See also

Published in

TSE Working Paper, n. 16-657, May 2016