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Risk-based selection in unemployment insurance: evidence and implications

Landais, Camille, Nekoei, Arash, Nilsson, Peter, Seim, David and Spinnewijn, Johannes (2017) Risk-based selection in unemployment insurance: evidence and implications. . Labour Economics and Public Economics, Centre for Economic Policy Research, London, UK.

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Abstract

This paper studies whether adverse selection can rationalize a universal mandate for unemployment insurance (UI). Building on a unique feature of the unemployment policy in Sweden, where workers can opt for supplemental UI coverage above a minimum mandate, we provide the first direct evidence for adverse selection in UI and derive its implications for UI design. We find that the unemployment risk is more than twice as high for workers who buy supplemental coverage, even when controlling for a rich set of observables. Exploiting variation in risk and prices to control for moral hazard, we show how this correlation is driven by substantial risk-based selection. Despite the severe adverse selection, we find that mandating the supplemental coverage is dominated by a design leaving the choice to workers. In this design, a large subsidy for supplemental coverage is optimal and complementary to the use of a minimum mandate. Our findings raise questions about the desirability of the universal mandate of generous UI in other countries, which has not been tested before.

Item Type: Monograph (Discussion Paper)
Official URL: https://cepr.org/
Additional Information: © 2017 The Authors
Divisions: Economics
Centre for Economic Performance
Subjects: H Social Sciences > HB Economic Theory
Sets: Departments > Economics
Research centres and groups > Centre for Economic Performance (CEP)
Date Deposited: 04 May 2018 14:19
Last Modified: 11 Jul 2019 23:34
Projects: 679704, 716485, 2015-00490
Funders: European Research Council, FORTE Grant
URI: http://eprints.lse.ac.uk/id/eprint/87779

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