Working Paper: CEPR ID: DP13959
Authors: Regis Barnichon; Yanos Zylberberg
Abstract: Unemployment insurance (UI) programs traditionally take the form of a single insurance contract offered to job seekers. In this work, we show that offering a menu of contracts can be welfare improving in the presence of adverse selection and moral hazard. When insurance contracts are composed of (i) a UI payment and (ii) a severance payment paid at the onset of unemployment, offering contracts with different ratios of UI benefits to severance payment is optimal under the equivalent of a single-crossing condition: job seekers in higher need of unemployment insurance should be less prone to moral hazard. In that setting, a menu allows the planner to attract job seekers with a high need for insurance in a contract with generous UI benefits, and to attract job seekers most prone to moral hazard in a separate contract with a large severance payment but little unemployment insurance. We propose a simple sufficient statistics approach to test the single-crossing condition in the data.
Keywords: unemployment insurance; adverse selection; moral hazard
JEL Codes: J65; D82
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| offering a menu of unemployment insurance contracts (J65) | welfare improvements (I38) |
| job seekers who require more unemployment insurance (J65) | less likely to engage in moral hazard behaviors (G52) |
| job seekers more prone to moral hazard (J68) | opt for contracts with larger severance payments and less unemployment insurance (J65) |
| type of contract chosen (K12) | job seekers' characteristics (J68) |
| low job offer rates (J63) | higher valuation of unemployment insurance (J65) |
| elasticity of reservation wages and insurance payments (J39) | validity of claims (C52) |