Time-consistent unemployment insurance

Abstract

This paper examines the optimal time-consistent unemployment insurance policy in a search economy with incomplete markets. In a context of repeated choice without a commitment device, we show that the optimal replacement rate depends on how frequently in time the policy can be revised. The exact relation is dependent on the political process: if the utilitarian welfare criterion is used, the optimal rate is higher the shorter the choice periodicity. Self-insurance reduces the need for the public scheme but mostly because the policy cannot be changed often enough. The comparison with an economy where a commitment device is assumed shows that the commitment rate is close to time-consistent rates with very long choice periodicities.