On existence of private unemployment insurance with advance information on future job losses

Tinbergen Institute Discussion Paper 2021-052/VI

34 Pages Posted: 15 Jun 2021

See all articles by Piotr Denderski

Piotr Denderski

University of Leicester - Department of Economics, Finance and Accounting

Christian A. Stoltenberg

University of Amsterdam, Department of Economics; Tinbergen Institute

Date Written: June 9, 2021

Abstract

We study the existence of a profitable unemployment insurance market in a dynamic economy with adverse selection rooting in information on future job losses. The new feature of the model is that the insurer and workers interact repeatedly. Repeated interactions make it possible to threaten workers with exclusion from future insurance benefits after a default on insurance premia. With exclusion, not only the insurance against the fundamental risk, but also against future bad news about job losses matters. In contrast to conventional wisdom, we find that private unemployment insurance in the US can be profitable for a relatively short exclusion length of one year. To stimulate the emergence of a private unemployment insurance market, policy makers can facilitate the creation of a registry that archives past defaults on insurance premia.

Keywords: Advance information, subjective expectations, adverse selection, unemployment insurance, repeated interactions, dynamic contracts

JEL Classification: D82, D86, G22, J65

Suggested Citation

Denderski, Piotr and Stoltenberg, Christian A., On existence of private unemployment insurance with advance information on future job losses (June 9, 2021). Tinbergen Institute Discussion Paper 2021-052/VI, Available at SSRN: https://ssrn.com/abstract=3866126 or http://dx.doi.org/10.2139/ssrn.3866126

Piotr Denderski (Contact Author)

University of Leicester - Department of Economics, Finance and Accounting ( email )

United Kingdom

Christian A. Stoltenberg

University of Amsterdam, Department of Economics ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Tinbergen Institute ( email )

Amsterdam
Netherlands

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