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American Economic Review: Vol. 98 No. 5 (December 2008)

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Liquidity and Insurance for the Unemployed

Article Citation

Shimer, Robert, and Ivan Werning. 2008. "Liquidity and Insurance for the Unemployed." American Economic Review, 98(5): 1922-42.

DOI: 10.1257/aer.98.5.1922

Abstract

We study unemployment insurance for workers who sequentially sample job opportunities. We focus on the optimal timing of benefits and the desirability of allowing borrowing and saving. When workers have constant absolute risk aversion, a simple policy is optimal: a constant benefit during unemployment, a constant tax during employment, and free access to a riskless asset. With constant relative risk aversion, optimal policy involves nearly constant benefits; more elaborate policies offer minuscule welfare gains. We highlight two distinct policy roles: ensuring workers have sufficient liquidity to smooth their consumption; and providing unemployment subsidies to insure against uncertain spell duration. (JEL J65)

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Authors

Shimer, Robert (U Chicago)
Werning, Ivan (MIT)

JEL Classifications

D81: Criteria for Decision-Making under Risk and Uncertainty
J64: Unemployment: Models, Duration, Incidence, and Job Search
J65: Unemployment Insurance; Severance Pay; Plant Closings


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