UNEMPLOYED BUT OPTIMISTIC: OPTIMAL INSURANCE DESIGN WITH BIASED BELIEFS. Issue 1 (13th August 2014)

• Record Type: Journal Article
• Authors: Spinnewijn, Johannes
• Is Part Of: Journal of the European Economic Association. Volume 13:Issue 1(2015:Feb.)
• Page Start: 130
• Page End: 167
• Publication Date: 2014-08-13
• Subjects: Economics -- Periodicals; Économie politique -- Périodiques; Science économique; Périodique électronique (Descripteur de forme); Ressource Internet (Descripteur de forme); 330
• DOI: 10.1111/jeea.12099
• Languages: English
• ISSNs: 1542-4766

Abstract

<abstract abstract-type="main"> <title>Abstract</title> <p>This paper analyzes how biased beliefs about employment prospects affect the optimal design of unemployment insurance. Empirically, I find that the unemployed greatly overestimate how quickly they will find work. As a consequence, they would search too little for work, save too little for unemployment and deplete their savings too rapidly when unemployed. I analyze the use of the "sufficient‐statistics" formula to characterize the optimal unemployment policy when beliefs are biased and revisit the desirability of providing liquidity to the unemployed. I also find that the optimal unemployment policy may involve increasing benefits during the unemployment spell.</p> </abstract>