Lukas Mayr (University of Essex), 19.06.2024

We study optimal unemployment insurance in a dynamic environment with heterogeneous agents, who face potentially binding liquidity constraints, and where neither search effort nor wealth is observable. In the constrained efficient allocation, the poorest agents always search, while richer agents start searching only after a spell of inactivity or not at all. Consumption levels of committed searchers are optimally declining in duration. We characterize various (Ricardian equivalent) implementations of the constrained optimum, including one that features a lump-sum layoff payment upon separation, zero benefits during unemployment, and duration-dependent re-employment taxes. By contrast, a policy with constant benefits during unemployment, which has been shown to be optimal in settings without liquidity constraints, is severely suboptimal in our framework.