Unemployment insurance design with repeated choices

Abstract

This article characterizes the relation between the equilibrium unemployment insurance replacement rate and the frequency of its political choice. We first use a tractable analytical model to show how insurance, incentive, and redistribution effects interact at the equilibrium. We then examine a fully repeated choices equilibrium in a quantitative heterogeneous agents model and show that unemployment persistence, whether a policy is announced first or not, and the type of the political process are key determinants of the relation between the equilibrium replacement rate and the frequency of its choice. In a utilitarian welfare context, we find that the equilibrium replacement rate is higher if the policy is chosen more frequently but this relation is reversed in a median voter context.