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This article studies a model of consumption, savings, and job search in which a borrowing constraint limits self-insurance. The government administers the unemployment insurance program that may condition on an individual’s asset position, but not on her efforts of finding a job. To compensate for the impediments to self-insurance, benefit payments should optimally be set higher at lower wealth levels and peak for borrowing-constrained individuals with zero liquid funds. A quantitative exercise reveals that the U.S. unemployment insurance program is surprisingly close to optimal for the asset poor, but far too generous for wealthier individuals. |
