Dr. Kyle Herkenhoff, University of Minnesota
This event is part of the Economics Seminar Series series.
Location:
Gerri C. LeBow Hall109
3220 Market Street
Philadelphia, PA 19104
Registration Option:
Dr. Herkenhoff will present “Can the Unemployed Borrow? Implications for Public Insurance”
Abstract: We show that individuals maintain significant access to credit following job loss. Unconstrained workers who lose their jobs borrow, while constrained workers who lose their jobs default and delever. Both default and borrowing allow unemployed workers to smooth consumption, and they pay an interest rate premium to do so, i.e. the credit market acts as a limited private unemployment insurance market. We show theoretically that a credit-registry and long-term credit relationships allow credit markets to serve as a market for private unemployment insurance, despite adverse selection. We then ask, given current U.S. credit access, what is the optimal provision of public unemployment insurance? We find that the optimal provision of public insurance is unambiguously lower as credit access expands. The median individual in our simulated economy would prefer to have the income replacement rate from public unemployment insurance lowered from the current US policy of 42% to 38%. However, a utilitarian planner would actually prefer to raise public unemployment insurance relative to current US levels, even in the presence of well-developed credit markets