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Unemployed But Optimistic: Optimal Insurance Design With Biased Beliefs

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  • Johannes Spinnewijn

Abstract

This paper analyzes how biased beliefs about employment prospects affect the optimal design of unemployment insurance. Empirically, I find that the unemployed greatly overestimate how quickly they will find work. As a consequence, they would search too little for work, save too little for unemployment and deplete their savings too rapidly when unemployed. I analyze the use of the “sufficient-statistics” formula to characterize the optimal unemployment policy when beliefs are biased and revisit the desirability of providing liquidity to the unemployed. I also find that the optimal unemployment policy may involve increasing benefits during the unemployment spell.

Suggested Citation

  • Johannes Spinnewijn, 2015. "Unemployed But Optimistic: Optimal Insurance Design With Biased Beliefs," Journal of the European Economic Association, European Economic Association, vol. 13(1), pages 130-167, February.
    • Handle: RePEc:bla:jeurec:v:13:y:2015:i:1:p:130-167
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    File URL: http://hdl.handle.net/10.1111/jeea.12099
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    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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