Unemployment Insurance and Adverse Selection

Julien Prat

Existing research on unemployment insurance under adverse selection is rather limited. To the best of our knowledge, the only published paper on the topic is the one by Hagedorn, Kaul, and Mennel in the Journal of Economics Dynamics and Control(2010). But it is mostly theoretical and does not estimate the expected benefits of screening. 

Thus our first contribution will consist of confronting the model to the data. We also plan to generalize the theoretical insights derived in Hagedorn et al. (2010). First, Hagedorn et al. (2010) assume that job seekers differ solely in their likelihood to find a job. We will introduce additional sources of heterogeneity. In particular, we will take into account the fact that unemployed workers have very different levels of savings, as documented by Chetty (2008, Journal of Political Economy). Second, we will devote particular attention to the mechanism design and discuss how screening could be implemented in practice. We will consider hybrid insurance schemes where, as already implemented in Chile, workers can access individual savings accounts which are monitored by the unemployment agency.

To sum-up, the design of unemployment insurance under adverse selection remains mostly unexplored and our objective consists, not only in characterizing the optimal mechanism but also in explaining how it could be concretely implemented.