Template-Type: ReDIF-Paper 1.0
Title: Consumption Commitments and Unemployment Insurance
Author-Name: Javier López Segovia
Author-Email: jlopezse@uni-bonn.de
Classification-JEL: E2, H2, I38, J64
Keywords: unemployment, consumption commitments, precautionary savings, optimal unemployment insurance

Abstract: Households allocate around 40% of their budget to goods and services that are
difficult to adjust, such as rents, mortgages, or mobile plans, which are called
“commitments”. Only about 11% of households adjust the consumption of
these goods every quarter. Commitments imply monthly payments that are
hard to avoid and make employment and income fluctuations more costly.
This paper analyzes the role of unemployment insurance in the presence of
commitments using a heterogeneous agents search model with incomplete markets and unemployment shocks. The model is calibrated to the US data and
matches key features of the US labor market. Using this framework, we show
that the existence of commitment goods amplifies the effects of unemployment insurance on search effort and unemployment duration. Commitments
also induce households to build larger precautionary savings. Morover, we
show that welfare gains from elimating UI increase from 3.4% to 4.2% when
commitments are considered. The optimal replacement rate is 57% in the
benchmark economy, higher than the current US policy (50%).


Note: 
Length: 49
Creation-Date: 2023-08
Revision-Date:
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp458
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2023_458