Should Unemployment Insurance Be Asset-Tested?

32 Pages Posted: 13 Jul 2013

See all articles by Sebastian Koehne

Sebastian Koehne

Stockholm University - Institute for International Economic Studies (IIES)

Moritz Kuhn

University of Bonn

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Abstract

We study asset-tested unemployment insurance in an incomplete markets model with moral hazard during job search. Asset testing has two counteracting effects on welfare. On the one hand, it improves consumption insurance by introducing state contingent transfers to agents most in need. On the other hand, it worsens the moral hazard problem, since workers have a reduced incentive to save and fewer private resources are used for consumption smoothing during unemployment. Our results show that in a realistically calibrated model of the U.S. economy the two effects nearly offset each other – the optimal rate of asset-testing is approximately zero. This finding is robust to several alternative specifications of the model, including a case with heterogeneous time-discount factors. We conclude that the current U.S. unemployment insurance system is approximately optimal.

Keywords: unemployment insurance, asset-testing, incomplete markets, consumption and saving

JEL Classification: E21, E24, J65

Suggested Citation

Koehne, Sebastian and Kuhn, Moritz, Should Unemployment Insurance Be Asset-Tested?. IZA Discussion Paper No. 7488, Available at SSRN: https://ssrn.com/abstract=2293305 or http://dx.doi.org/10.2139/ssrn.2293305

Sebastian Koehne (Contact Author)

Stockholm University - Institute for International Economic Studies (IIES) ( email )

Stockholm University
Stockholm, SE-10691
Sweden

Moritz Kuhn

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Germany

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