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Incentive-compatible unemployment reinsurance for the euro area

Author

Listed:
  • Alexander Karaivanov
  • Benoit Mojon
  • Luiz Awazu Pereira da Silva
  • Albert Pierres Tejada
  • Robert M Townsend

Abstract

We model a reinsurance mechanism for the national unemployment insurance programs of euro area member states. The proposed risk-sharing scheme is designed to smooth country-level unemployment risk and expenditures around each country's median level, so that participation and contributions remain incentive-compatible at all times and there are no redistributionary transfers across countries. We show that, relative to the status quo, such scheme would have provided nearly perfect insurance of the euro area member states' unemployment expenditures risk in the aftermath of the 2009 sovereign debt crisis if allowed to borrow up to 2 percent of the euro area GDP. Limiting, or not allowing borrowing by the scheme would have still provided significant smoothing of surpluses and deficits in the national unemployment insurance programs over the period 2000-2019.

Suggested Citation

  • Alexander Karaivanov & Benoit Mojon & Luiz Awazu Pereira da Silva & Albert Pierres Tejada & Robert M Townsend, 2024. "Incentive-compatible unemployment reinsurance for the euro area," BIS Working Papers 1180, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1180
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    References listed on IDEAS

    as
    1. Jonathan Thomas & Tim Worrall, 1988. "Self-Enforcing Wage Contracts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 55(4), pages 541-554.
    2. Nathaniel G Arnold & Bergljot B Barkbu & H. Elif Ture & Hou Wang & Jiaxiong Yao, 2018. "A Central Fiscal Stabilization Capacity for the Euro Area," IMF Staff Discussion Notes 18/03, International Monetary Fund.
    3. Ábrahám, Árpád & Brogueira de Sousa, João & Marimon, Ramon & Mayr, Lukas, 2023. "On the design of a European Unemployment Insurance System," European Economic Review, Elsevier, vol. 156(C).
    4. Alexander Karaivanov & Robert M. Townsend, 2014. "Dynamic Financial Constraints: Distinguishing Mechanism Design From Exogenously Incomplete Regimes," Econometrica, Econometric Society, vol. 82(3), pages 887-959, May.
    5. Georgios Chortareas, 2013. "Fiscal Policy Rules in Monetary Unions," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 36(1), pages 85-104.
    6. Guillaume Claveres & Jan Stráský, 2018. "Stabilising the Euro Area through unemployment benefits re-insurance scheme," OECD Economics Department Working Papers 1497, OECD Publishing.
    7. Mr. Nathaniel G Arnold & Ms. Bergljot B Barkbu & H. Elif Ture & Hou Wang & Jiaxiong Yao, 2018. "A Central Fiscal Stabilization Capacity for the Euro Area," IMF Staff Discussion Notes 2018/003, International Monetary Fund.
    8. László Andor, 2016. "Towards shared unemployment insurance in the euro area," IZA Journal of European Labor Studies, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 5(1), pages 1-15, December.
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    More about this item

    Keywords

    unemployment insurance; risk sharing; reinsurance; euro area; fiscal policy; mechanism design; limited commitment;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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