Positive Externalities of Social Insurance: Unemployment Insurance and Consumer Credit
Joanne W. Hsu
Federal Reserve Board of Governors
David A. Matsa
Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER)
Northwestern University - Kellogg School of Management - Department of Finance
July 15, 2014
This paper studies the impact of unemployment insurance (UI) on consumer credit markets. Exploiting heterogeneity in UI generosity across U.S. states and over time, we find that UI helps the unemployed avoid defaulting on their mortgage debt. We estimate that UI expansions during the Great Recession prevented about 1.4 million foreclosures. Lenders respond to this decline in default risk by expanding credit access and reducing interest rates for low-income households at risk of being laid off. Our findings call attention to two benefits of unemployment insurance not previously highlighted: reducing deadweight losses from loan default and expanding access to credit.
Number of Pages in PDF File: 60
Date posted: December 5, 2012 ; Last revised: July 25, 2014
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