Income-Contingent Loans as an Unemployment Benefit

52 Pages Posted: 30 Aug 2021 Last revised: 13 Apr 2023

See all articles by Haaris Mateen

Haaris Mateen

C. T. Bauer College of Business, University of Houston

Joseph E. Stiglitz

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER)

Jungyoll Yun

Ewha Womans University

Date Written: August 2021

Abstract

Imperfections in risk and capital markets imply that individuals who lose jobs suffer from imperfect smoothing of consumption across states and times. Compared to the first best, there will be too little search. Optimal unemployment programs, which balance the marginal benefit of consumption smoothing vs. the marginal cost of the insurance externality, increase welfare and may even increase GDP. Our analytical results suggest that welfare is higher if the unemployment benefits program includes income-contingent unemployment loans (ICL), where the amount repaid depends on the individual’s future income. Such loans can be financed by a risk premium imposed on the unemployed who avail themselves of the loans, and partially substitute for unemployment insurance (UI) benefits. Optimal unemployment benefits programs (UB) with ICL do a better job of smoothing consumption across states and time, and in particular total benefits when unemployed increase. We analyze how changes in key parameters, such as the degree of risk aversion and the nature of post-employment work, affect the design of the optimal UB program and the magnitude of the incremental benefits from including income-contingent loans.

Suggested Citation

Mateen, Haaris and Stiglitz, Joseph E. and Yun, Jungyoll, Income-Contingent Loans as an Unemployment Benefit (August 2021). NBER Working Paper No. w29198, Available at SSRN: https://ssrn.com/abstract=3913847

Haaris Mateen (Contact Author)

C. T. Bauer College of Business, University of Houston ( email )

United States

Joseph E. Stiglitz

Columbia University - Columbia Business School, Finance ( email )

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Jungyoll Yun

Ewha Womans University ( email )

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Seoul 120-750, Seoul 120

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