Moral Hazard versus Liquidity and Optimal Unemployment Insurance

By Raj Chetty. Journal of Political Economy, 2008

790 citations recorded by the source corpus.

This paper presents new evidence on why unemployment insurance (UI) benefits affect search behavior and develops a simple method of calculating the welfare gains from UI using this evidence. I show that 60 percent of the increase in unemployment durations caused by UI benefits is due to a “liquidity effect” rather than distortions on marginal incentives to search (“moral hazard”) by combining two empirical strategies. First, I find that increases in benefits have much larger effects on durations for liquidity‐constrained households. Second, lump‐sum severance payments increase durations substantially among constrained households. I derive a formula for the optimal benefit level that depends only on the reduced‐form liquidity and moral hazard elasticities. The formula implies that the optimal UI benefit level exceeds 50 percent of the wage. The “exact identification” approach to welfare analysis proposed here yields robust optimal policy results because it does not require structural estimation of primitives.

Subfields: Economics and Econometrics, Gender Studies

View Paper: https://www.semanticscholar.org/paper/47f4058adcd3f30c9c433298078f2ff704b9d886

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Citations in the corpus

Consumer Spending during Unemployment: Positive and Normative Implications (2019, positive): “study a model with endogenous consumption in the tradition of Deaton (1991) and Carroll (1997) and endogenous job search as in Mortensen (1977) and DellaVigna et al.”
An Assessment of the Effectiveness of Anti-Poverty Programs in the United States. Cambridge, MA: National Bureau of Economic Research (2011, positive): “We take our figures from the recent study of Chetty (2008), whose estimates fall within the range of prior ones, because he provides estimates of mean unemployment spell lengths and pre-retirement earnings, which we can use to translate the effect of a change in weeks not worked to one on annual…”
Fiscal Policy in an Unemployment Crisis (2016, background): “…is equal to 62 percent, implying an expected unemployment duration of around 7.5 weeks.28 The separation rate, δ, is equal 4×0.034 which is in line with the average found in the data.29 Unemployment benefits are set to 0.5, which approximates a 50 percent replacement rate (Chetty, 2008).”
A Reduced-Form Approach to Behavioral Public Finance (2012, background): “23Note too that unemployment insurance, which replaces a fraction of wages to the covered unemployed, presents an analytically analogous policy problem, as indicated in work such as Baily (1978) and Chetty (2008).”
Unemployment Insurance and Job Search in the Great Recession (2011, background): “Chetty (2008) finds that much of the search effect of UI is concentrated among those who are credit constrained, and that lump-sum severance pay has an effect similar to that of UI benefit extensions (see also Card, Chetty, and Weber 2007a).”
The Policy Elasticity (2016, background): “I would like to thank Raj Chetty, Amy Finkelstein, Don Fullerton, Peter Ganong, Adam Guren, Louis Kaplow, Wojciech Kopczuk, Erzo Luttmer, Emmanuel Saez, and seminar participants at Chicago Booth School of Business, Brown University, The University of Chicago, the Columbia Tax Policy Workshop, and th”
A Search and Matching Approach to Labor Markets: Did the Natural Rate of Unemployment Rise? (2012, methodology): “Based on existing empirical research using U.S. data, Chetty (2008) noted that a 10 percent increase in the overall value of unemployment insurance benefi ts increases unemployment durations by 4–8 percent.”
Are the Long-Term Unemployed on the Margins of the Labor Market? (2014, background): “We limit our sample to individuals who reported a new spell of unemployment each calendar year, and following Raj Chetty (2008) we exclude the first sample month because new spells cannot be identified that month.”
Optimal Taxation and Social Insurance with Endogenous Private Insurance (2010, neutral): “The optimal contract when e¤ort is unobservable speci es consumption levels contingent on output realization that reduce the variance of consumption.”