TY  - JOUR
AU  - Chetty,Raj
TI  - Moral Hazard vs. Liquidity and Optimal Unemployment Insurance
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13967
PY  - 2008
Y2  - April 2008
UR  - http://www.nber.org/papers/w13967
L1  - http://www.nber.org/papers/w13967.pdf
N1  - Author contact info:
Raj Chetty
Department of Economics
Harvard University
1805 Cambridge St.
Cambridge, MA 02138
Tel: 617-744-9492
E-Mail: chetty@fas.harvard.edu
M2  - featured in NBER digest on 2008-09-01
AB  - This paper presents new evidence on why unemployment insurance (UI) benefits affect search behavior and develops a simple method of calculating the welfare gains from UI using this evidence. I show that 60 percent of the increase in unemployment durations caused by UI benefits is due to a "liquidity effect" rather than distortions in marginal incentives to search ("moral hazard") by combining two empirical strategies. First, I find that increases in benefits have much larger effects on durations for liquidity constrained households. Second, lump-sum severance payments increase durations substantially among constrained households. I derive a formula for the optimal benefit level that depends only on the reduced-form liquidity and moral hazard elasticities. The formula implies that the optimal UI benefit level exceeds 50 percent of the wage. The "exact identification" approach to welfare analysis proposed here yields robust optimal policy results because it does not require structural estimation of primitives.
ER  -