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Unemployed but Optimistic: Optimal Insurance Design With Biased Beliefs

Year: 2014

Type: article

Abstract: This paper analyzes how biased beliefs about employment prospects affect the optimal design of unemployment insurance. Empirically, I find that the unemployed greatly overestimate how quickly they will find work. As a consequence, they would search too little for work, save too little for unemployment and deplete their savings too rapidly when unemployed. I analyze the use of the “sufficient-statistics” formula to characterize the optimal unemployment policy when beliefs are biased and revisit the desirability of providing liquidity to the unemployed. I also find that the optimal unemployment policy may involve increasing benefits during the unemployment spell.

Source: Journal of the European Economic Association

DOI: 10.1111/jeea.12099

Author: Johannes Spinnewijn

Institution: London School of Economics and Political Science

Language: English

Topic: Labor market dynamics and wage inequality

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDGs: Decent work and economic growth, No poverty

Open Access status: bronze

OpenAlex ID: W2148335039