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Unemployed but optimistic: optimal insurance design with biased beliefs

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  • Spinnewijn, Johannes

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

  • Spinnewijn, Johannes, 2015. "Unemployed but optimistic: optimal insurance design with biased beliefs," LSE Research Online Documents on Economics 59165, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:59165
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    Keywords

    biased belief; unemployment; optimal insurance; moral hazard;
    All these keywords.

    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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