Borrowing constraints,the cost of precautionary saving and unemployment insurance |
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Authors: | Thomas F Crossley Hamish Low |
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Institution: | (1) Department of Apparel, Housing, and Resource Management, College of Liberal Arts and Human Sciences, Virginia Tech, 258 Wallace Hall, Blacksburg, VA 24061, USA;(2) Department of Consumer Sciences, The Ohio State University, Campbell Hall 265J, 1787 Neil Ave., Columbus, OH 43210, USA |
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Abstract: | When it is costly for individuals to save or to borrow, unemployment insurance (UI) provides an alternative source of liquidity
that smooths consumption over time and leads individuals to spend longer unemployed searching for a suitable job. We show
in a tractable life-cycle model how the optimal unemployment replacement ratio and the fall in consumption on job loss depend
on the cost of self-insurance and the cost of borrowing. This implies that the value of UI depends on age at job loss, consumption
needs (such as the presence of children), discount rates, the return on saving, access to credit and the presence of other
social insurance programmes. Optimal replacement rates vary substantially with plausible variation in these factors (from
less than 20 percent to almost 60 percent). |
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