Insuring Against Unemployment

Abstract: This paper studies optimal public unemployment insurance (UI) when workers have the possibility of topping-up public UI with private UI that is endogenous to public UI and subject to moral hazard. The issue is analyzed with a theoretical model in which publicly insured workers, who differ in layoff risk, hidden to the planner, are offered to top-up public UI with private UI. In the model, high risk workers top-up while low risk workers abstain from private UI. The result is lower public UI while UI with top-up is more generous compared to UI in a purely public system. Less risk pooling, however, leads to higher costs for mixed UI provision. Then, I show that the effect of public UI on assets, private UI and unemployment duration can be used as sufficient statistics to calibrate the impact on welfare from public UI in the presence of private UI. I estimate the effects using data on a Swedish union run top-up scheme. Identification is achieved using a kinked public UI benefit rule. Calibrating the model shows that workers with mixed UI experience a negative impact on welfare from increased public UI while those with only public UI seem to have about optimal UI coverage.