Beiträge zur Jahrestagung des Vereins für Socialpolitik 2016: Demographischer Wandel - Session: Unemployment and School-to-Work Transition F18-V3
This paper studies how duration dependence and dynamic selection affect the optimal timing of unemployment insurance benefits. Using administrative unemployment records from Germany, we estimate a job search model with savings to empirically disentangle various forms of duration dependence and dynamic selection. Duration dependence and dynamic selection are identified separately using multiple unemployment spells of individuals. We connect our estimates to the optimal insurance problem of the government and the local consumption smoothing gains and moral hazard costs. Our results show that duration dependence and dynamic selection push towards increasing schedules, primarily by lowering the moral hazard costs of providing benefits later in the spell. As a result, individuals' liquidity needs tend to increase faster than the moral hazard distortions over the unemployment spell.