Consumption Commitments and Unemployment Insurance

Households allocate around 40% of their budget to goods and services that are difficult to adjust, such as rents, mortgages, or mobile plans, which are called “commitments”. Only about 11% of households adjust the consumption of these goods every quarter. Commitments imply monthly payments that are hard to avoid and make employment and income fluctuations more costly. This paper analyzes the role of unemployment insurance in the presence of commitments using a heterogeneous agents search model with incomplete markets and unemployment shocks. The model is calibrated to the US data and matches key features of the US labor market. Using this framework, we show that the existence of commitment goods amplifies the effects of unemployment insurance on search effort and unemployment duration. Commitments also induce households to build larger precautionary savings. Morover, we show that welfare gains from elimating UI increase from 3.4% to 4.2% when commitments are considered. The optimal replacement rate is 57% in the benchmark economy, higher than the current US policy (50%).