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Borrowing constraints, the cost of precautionary saving and unemployment insurance

Crossley, TF and Low, H (2011) 'Borrowing constraints, the cost of precautionary saving and unemployment insurance.' International Tax and Public Finance, 18 (6). 658 - 687. ISSN 0927-5940

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Abstract

When it is costly for individuals to save or to borrow, unemployment insurance (UI) provides an alternative source of liquidity that smooths consumption over time and leads individuals to spend longer unemployed searching for a suitable job. We show in a tractable life-cycle model how the optimal unemployment replacement ratio and the fall in consumption on job loss depend on the cost of self-insurance and the cost of borrowing. This implies that the value of UI depends on age at job loss, consumption needs (such as the presence of children), discount rates, the return on saving, access to credit and the presence of other social insurance programmes. Optimal replacement rates vary substantially with plausible variation in these factors (from less than 20 percent to almost 60 percent). © 2011 Springer Science+Business Media, LLC.

Item Type: Article
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences > Economics, Department of
Depositing User: Jim Jamieson
Date Deposited: 22 Sep 2013 12:02
Last Modified: 17 Aug 2017 17:57
URI: http://repository.essex.ac.uk/id/eprint/7513

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