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Unemployed but optimistic: optimal insurance design with biased beliefs

Spinnewijn, Johannes (2015) Unemployed but optimistic: optimal insurance design with biased beliefs. Journal of the European Economic Association, 13 (1). pp. 130-167. ISSN 1542-4766

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Identification Number: 10.1111/jeea.12099


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.

Item Type: Article
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Additional Information: © 2014 European Economic Association
Divisions: Economics
Subjects: H Social Sciences > H Social Sciences (General)
H Social Sciences > HC Economic History and Conditions
JEL classification: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search; Learning; Information and Knowledge; Communication; Belief
G - Financial Economics > G2 - Financial Institutions and Services > G22 - Insurance; Insurance Companies
H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H30 - General
Date Deposited: 28 Aug 2014 13:34
Last Modified: 20 Oct 2021 02:15

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