Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/171018 
Year of Publication: 
2017
Series/Report no.: 
IZA Discussion Papers No. 11034
Publisher: 
Institute of Labor Economics (IZA), Bonn
Abstract: 
This article analyzes the behavioral effects of unemployment benefits (UB) and it characterizes their optimal level when jobless people only survive if they have access to a minimum or subsistence consumption level in each period. To survive when the level of UB is very low, they carry out a subsistence activity. Our model shows that if the level of UB is very low, increasing its level or providing liquidity to the agent can decrease the duration in unemployment; for higher levels of UB we reencounter the standard properties that increasing UB increases duration and that providing liquidity to the agent increases duration (Chetty, 2008). We also show that the optimal level of UB satisfies the Baily-Chetty formula (Baily, 1978, Chetty, 2006), but contrary to Chetty (2008), in our model the gain from insurance cannot be rewritten using sufficient statistics; we show that such decomposition requires specific modeling assumptions.
Subjects: 
liquidity effect
scarcity
monetary costs
optimal insurance
JEL: 
D91
H21
J64
J65
Document Type: 
Working Paper

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