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The Optimal Timing of Unemployment Benefits: Theory and Evidence from Sweden
Stockholm University, Faculty of Social Sciences, Institute for International Economic Studies.
Number of Authors: 42018 (English)In: The American Economic Review, ISSN 0002-8282, E-ISSN 1944-7981, Vol. 108, no 4-5, p. 985-1033Article in journal (Refereed) Published
Abstract [en]

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 the spell. Second, we find that the drop in consumption affecting the insurance value of benefits is large from the start of the spell, hut further increases throughout tie 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.

Place, publisher, year, edition, pages
2018. Vol. 108, no 4-5, p. 985-1033
National Category
Economics and Business
Identifiers
URN: urn:nbn:se:su:diva-156054DOI: 10.1257/aer.20160816ISI: 000428815200003OAI: oai:DiVA.org:su-156054DiVA, id: diva2:1210077
Available from: 2018-05-25 Created: 2018-05-25 Last updated: 2018-05-25Bibliographically approved

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