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American Economic Review: Vol. 98 No. 5 (December 2008)
AER Volume. 98, Issue 5 | 
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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
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)
Article Full-Text Access
Full-text Article
Authors
Shimer, Robert (U Chicago)
Werning, Ivan (MIT)
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
J64: Unemployment: Models, Duration, Incidence, and Job Search
J65: Unemployment Insurance; Severance Pay; Plant Closings
