Unemployed but Optimistic: Optimal Insurance Design With Biased Beliefs

Spinnewijn, Johannes

doi:10.1111/jeea.12099

Cited by 175 publications

(155 citation statements)

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“…The assumption that the agent is borrowing constrained is restrictive, but guarantees that search behaviour remains the same over the unemployment spell and thus simplifies the derivations. Note that search behaviour remains the same in a model with savings when the agent has CARA preferences with monetary cost of search efforts (i.e., Spinnewijn [2015], again simplifying the derivation of the optimal benefit profile.…”

Section: A31 Proof Of Propositionmentioning

confidence: 99%

“…Spinnewijn [2015] accounts for internalities due to biased beliefs about employment prospects. Landais et al [2010] adjust the characterization to account for frictions in the labor market and general equilibrium effects.…”

Section: Robustnessmentioning

confidence: 99%

“…We provide a characterization of the optimal profile in a non-stationary environment with heterogeneous agents. In the spirit of the "sufficientstatistics" literature, our approach consists in identifying the minimal level of information necessary 1 Recent dynamic extensions of the Baily-Chetty formula can be found in Schmieder et al [2012b], analyzing the potential benefit duration for a given benefit level, and in Spinnewijn [2015], providing a formula for the optimal intercept and slope of a linear benefit profile.…”

Section: Modelmentioning

confidence: 99%

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The Optimal Timing of Unemployment Benefits: Theory and Evidence from Sweden

Kolsrud

Landais

Nilsson³

et al. 2018

American Economic Review

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127

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This paper provides a simple, yet robust framework to evaluate the time profile of benefits paid during an unemployment spell. We derive sufficient-statistics formulae capturing the marginal insurance value and incentive costs of unemployment benefits paid at different times during a spell. Our approach allows us to revisit separate arguments for inclining or declining profiles put forward in the theoretical literature and to identify welfare-improving changes in the benefit profile that account for all relevant arguments jointly. For the empirical implementation, we use administrative data on unemployment, linked to data on consumption, income and wealth in Sweden. First, we exploit duration-dependent kinks in the replacement rate and find that, if anything, the moral hazard cost of benefits is larger when paid earlier in the spell. Second, we find that the drop in consumption affecting the insurance value of benefits is large from the start of the spell, but further increases throughout the spell. In trading off insurance and incentives, our analysis suggests that the flat benefit profile in Sweden has been too generous overall. However, both from the insurance and the incentives side, we find no evidence to support the introduction of a declining tilt in the profile.Keywords: Unemployment, Dynamic Policy, Sufficient Statistics, Consumption Smoothing JEL codes: H20, J64 * We thank Tony Atkinson, Richard Blundell, Raj Chetty, Liran Einav, Hugo Hopenhayn, Philipp Kircher, Henrik Kleven, Alan Manning, Arash Nekoei, Nicola Pavoni, Torsten Persson, Jean-Marc Robin, Emmanuel Saez, Florian Scheuer, Robert Shimer, Frans Spinnewyn, Ivan Werning, Gabriel Zucman and seminar participants at the NBER PF Spring Meeting, SED Warsaw, EEA Mannheim, DIW Berlin, Kiel, Zurich, Helsinki, Stanford, Leuven, Uppsala, IIES, Yale, IFS, Wharton, Sciences Po, UCLA, Sussex, Berkeley, MIT, Columbia, LMU and LSE for helpful discussions and suggestions. We also thank Iain Bamford, Albert Brue-Perez, Jack Fisher, Benjamin Hartung, Panos Mavrokonstantis and Yannick Schindler for excellent research assistance. We acknowledge financial support from the ERC (grant #716485 and #716485), the Sloan foundation (NBER grant #22-2382-15-1-33-003), STICERD and the CEP. 1The key objective of social insurance programs is to provide insurance against adverse events while maintaining incentives. The impact of these adverse events is dynamic and so are the insurance value and incentive cost of social protection against these events. As a consequence, the design of social insurance policies tends to be dynamic as well, specifying a schedule of benefits and taxes that are time-dependent. In the context of unemployment insurance (UI), the UI policy specifies a full benefit profile designed to balance incentives and insurance throughout the unemployment spell. Solving this dynamic problem can prove daunting, especially when adding important features of unemployment dynamics involving selection and non-stationarities. Indeed, there seems to be little conse...

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Section: A31 Proof Of Propositionmentioning

confidence: 99%

Section: Robustnessmentioning

confidence: 99%

Section: Modelmentioning

confidence: 99%

See 1 more Smart Citation

The Optimal Timing of Unemployment Benefits: Theory and Evidence from Sweden

Kolsrud

Landais

Nilsson³

et al. 2018

American Economic Review

Self Cite

127

130

View full text Add to dashboard Cite

show abstract

“…The goal of the unemployment system is to allow jobseekers to maintain their consumption levels while at the same time minimizing moral hazard problems. Spinnewijn (2009) analyzes the optimal design of insurance contracts -like unemployment insurance schemes -when agents have biased beliefs about the impact of their effort (job search) in avoiding future losses (continued unemployment). Though Spinnewijn frames his discussion in the context of agents being either 'optimistic' versus 'pessimistic' in their views about the returns to effort, the distinction between an internal versus external locus of control is analogous.…”

Section: Labor Market Policymentioning

confidence: 99%

Locus of Control and the Labor Market

Cobb‐Clark

2014

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractThis paper reviews the role of locus of control in the labor market. I begin with a discussion of the conceptual origins of locus of control, including its relationship to related concepts such as self-efficacy, motivation, and self-control. The relationship between locus of control and labor market success is then summarized. In doing so, I pay careful attention to what we know about three potential mechanisms -human capital investments, hiring decisions, and optimal incentive contracts -through which locus of control might operate. Finally, the broader implications of these relationships for public policy and future research are discussed.

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“…22 However, when the optimal search level is constant -during the stationary state or when search is binary -net consumption will thus be decreasing in the length of the unemployment spell. For CARA preferences, this decrease will be linear, as previously shown in Werning (2002) and Spinnewijn (2009). 23 Notice that the optimal contract makes both consumption during unemployment and upon re-employment dependent on the length of the unemployment spell, to spread incentives optimally over all future states, including employment (Hopenhayn and Nicolini 1997).…”

Section: Propositionmentioning

confidence: 79%

Training and search during unemployment

Spinnewijn

2013

Journal of Public Economics

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Displaced workers often experience large losses in earnings even a long time after reemployment. Training programs during unemployment mitigate these losses but also a¤ect the unemployed's willingness to search. This paper analyzes how mandatory training programs a¤ect the optimal design of unemployment insurance and how the training intensity should evolve during the unemployment spell. The introduction of training reverses the optimal consumption dynamics during the unemployment spell and makes it optimal to incentivize the long-term unemployed to …nd employment despite the depreciation of their human capital. Targeting training programs towards the long-term unemployed, however, is optimal only if the fall in human capital upon displacement is small relative to the depreciation during unemployment.Keywords: Unemployment, Optimal Insurance, Human Capital, Training JEL Classi…cation Numbers: H21, J62, J64I would like to thank Arthur Campbell, Peter Diamond, Florian Ederer, Jesse Edgerton, Bengt Holmström, Henrik Kleven, Gerard Padró i Miquel, Frans Spinnewyn, Ivan Werning, the editor, three anonymous referees, and seminar participants at MIT, Warwick University and the EEA-ESEM meetings for many helpful comments and suggestions.

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Unemployed but Optimistic: Optimal Insurance Design With Biased Beliefs

Cited by 175 publications

References 65 publications

The Optimal Timing of Unemployment Benefits: Theory and Evidence from Sweden

The Optimal Timing of Unemployment Benefits: Theory and Evidence from Sweden

Locus of Control and the Labor Market

Training and search during unemployment

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