Is There Always a Trade-Off between Insurance and Incentives? The Case of Unemployment with Subsistence Constraints

36 Pages Posted: 2 Oct 2017

See all articles by Juliana Mesén Vargas

Juliana Mesén Vargas

IRES, Universit Catholique de Louvain

Bruno Van der Linden

Université Catholique de Louvain - Institut de Recherches Economiques et Sociales; IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Abstract

This article analyzes the behavioral effects of unemployment benefits (UB) and it characterizes their optimal level when jobless people only survive if they have access to a minimum or subsistence consumption level in each period. To survive when the level of UB is very low, they carry out a subsistence activity. Our model shows that if the level of UB is very low, increasing its level or providing liquidity to the agent can decrease the duration in unemployment; for higher levels of UB we reencounter the standard properties that increasing UB increases duration and that providing liquidity to the agent increases duration (Chetty, 2008). We also show that the optimal level of UB satisfies the Baily-Chetty formula (Baily, 1978, Chetty, 2006), but contrary to Chetty (2008), in our model the gain from insurance cannot be rewritten using sufficient statistics; we show that such decomposition requires specific modeling assumptions.

Keywords: liquidity effect, scarcity, monetary costs, optimal insurance

JEL Classification: D91, H21, J64, J65

Suggested Citation

Mesén Vargas, Juliana and Van der Linden, Bruno, Is There Always a Trade-Off between Insurance and Incentives? The Case of Unemployment with Subsistence Constraints. IZA Discussion Paper No. 11034. Available at SSRN: https://ssrn.com/abstract=3045730

Juliana Mesén Vargas (Contact Author)

IRES, Universit Catholique de Louvain ( email )

Belgium

Bruno Van der Linden

Université Catholique de Louvain - Institut de Recherches Economiques et Sociales ( email )

3, Place Montesquieu
Louvain-la-Neuve, 1348
Belgium

HOME PAGE: http://perso.uclouvain.be/bruno.vanderlinden/

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
13
Abstract Views
174
PlumX Metrics