Positive Externalities of Social Insurance: Unemployment Insurance and Consumer Credit

Joanne W. Hsu, David A. Matsa, Brian T. Melzer

NBER Working Paper No. 20353
Issued in July 2014
NBER Program(s):Corporate Finance Program, Public Economics Program

This paper studies the impact of unemployment insurance (UI) on consumer credit markets. Exploiting heterogeneity in UI generosity across U.S. states and over time, we find that UI helps the unemployed avoid defaulting on their mortgage debt. We estimate that UI expansions during the Great Recession prevented about 1.4 million foreclosures. Lenders respond to this decline in default risk by expanding credit access and reducing interest rates for low-income households at risk of being laid off. Our findings call attention to two benefits of unemployment insurance not previously highlighted: reducing deadweight losses from loan default and expanding access to credit.

A non-technical summary of this paper is available in the December 2014 NBER Digest.  You can sign up to receive the NBER Digest by email.

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Document Object Identifier (DOI): 10.3386/w20353

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