Public Economics Lectures Part 1: Introduction

Baily-Chetty Consumption-Based Formula
Theorem
The optimal unemployment benefit level b ∗ satisfies
where
∆c
c
= c h − c l
c h
γ ∆c
c (b∗ ) ≈ ε 1−e,b
e
= consumption drop during unemployment
γ = − u′′ (c h )
u ′ (c h ) c h = coeffi cient of relative risk aversion
ε 1−e,b = d log 1 − e
d log b
= elast. of probability of unemp. w.r.t. benefits
Public Economics Lectures () Part 6: Social Insurance 52 / 207