Risk-Based Selection in Unemployment Insurance: Evidence and Implications

72 Pages Posted: 16 Oct 2017

See all articles by Camille Landais

Camille Landais

London School of Economics & Political Science (LSE)

Arash Nekoei

Harvard University

Peter Nilsson

Stockholm University - Institute for International Economic Studies (IIES)

David Seim

Stockholm University; Centre for Economic Policy Research (CEPR)

Johannes Spinnewijn

London School of Economics & Political Science (LSE)

Date Written: October 2017

Abstract

This paper studies whether adverse selection can rationalize a universal mandate for unemployment insurance (UI). Building on a unique feature of the unemployment policy in Sweden, where workers can opt for supplemental UI coverage above a minimum mandate, we provide the first direct evidence for adverse selection in UI and derive its implications for UI design. We find that the unemployment risk is more than twice as high for workers who buy supplemental coverage, even when controlling for a rich set of observables. Exploiting variation in risk and prices to control for moral hazard, we show how this correlation is driven by substantial risk-based selection. Despite the severe adverse selection, we find that mandating the supplemental coverage is dominated by a design leaving the choice to workers. In this design, a large subsidy for supplemental coverage is optimal and complementary to the use of a minimum mandate. Our findings raise questions about the desirability of the universal mandate of generous UI in other countries, which has not been tested before.

Keywords: Adverse Selection, Mandate, Subsidy, Unemployment insurance

Suggested Citation

Landais, Camille and Nekoei, Arash and Nilsson, Peter and Seim, David and Spinnewijn, Johannes, Risk-Based Selection in Unemployment Insurance: Evidence and Implications (October 2017). CEPR Discussion Paper No. DP12364. Available at SSRN: https://ssrn.com/abstract=3053890

Camille Landais (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Arash Nekoei

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

Peter Nilsson

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

Stockholm, SE-10691
Sweden

David Seim

Stockholm University ( email )

Universitetsvägen 10
Stockholm, Stockholm SE-106 91
Sweden

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Johannes Spinnewijn

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
00 44 (0) 20 7955 7022 (Phone)

HOME PAGE: http://econ.lse.ac.uk/staff/spinnewijn_johannes/

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