How Do Politicians Save? Buffer Stock Management of Unemployment Insurance Finance

48 Pages Posted: 25 Jun 2013

See all articles by Steven G. Craig

Steven G. Craig

University of Houston - Department of Economics

Wided Hemissi

University of Houston

Satadru Mukherjee

University of Houston

Bent E. Sørensen

University of Houston - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: June 2013

Abstract

This paper successfully fits a model of forward looking government savings behavior to data from the U.S. state Unemployment Insurance (UI) programs 1976-2008. Specifically, we find states do not perfectly smooth tax rates in Barro's sense, but follow behavior consistent with a buffer stock model where politicians trade-off their desire to immediately expend all savings against the fear of running out of funds. We find that states increase benefits or lower taxes when savings balances are high. State UI budgets, as rationalized by the buffer stock model, display surpluses that are more pro-cyclical than Barro's model would imply but substantially less cyclical than contemporaneous budget balance.

Keywords: forward looking politicians, impatience, precautionary saving

JEL Classification: E21, H11, H74

Suggested Citation

Craig, Steven G. and Hemissi, Wided and Mukherjee, Satadru and Sorensen, Bent E., How Do Politicians Save? Buffer Stock Management of Unemployment Insurance Finance (June 2013). CEPR Discussion Paper No. DP9520, Available at SSRN: https://ssrn.com/abstract=2284610

Steven G. Craig (Contact Author)

University of Houston - Department of Economics ( email )

McElhinney Building
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Houston, TX 77204-5882
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713-743-3812 (Phone)
713-743-3798 (Fax)

Wided Hemissi

University of Houston ( email )

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Satadru Mukherjee

University of Houston ( email )

Bent E. Sorensen

University of Houston - Department of Economics ( email )

204 McElhinney Hall
Houston, TX 77204-5882
United States
713-743-3841 (Phone)
713-743-3798 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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