On the existence of private unemployment insurance with advance information on future job losses

Abstract

We study the existence of a profitable unemployment insurance market in a dynamic economy with adverse selection rooted in workers’ advance information on future job losses. The new feature of the model is that the insurer and workers interact repeatedly. Repeated interactions make it possible to threaten workers with exclusion from future insurance benefits after a default on insurance premia. With exclusion, the insurer can offer not only insurance against unemployment risk itself but also against bad news about a future job loss. We discipline our model with estimates of the willingness to pay for unemployment insurance and the costs of adverse selection in the US. Our quantitative results illustrate that private unemployment insurance could be profitable for an exclusion length of one year. To stimulate the emergence of a private unemployment insurance market, policymakers can facilitate the creation of a registry that archives past defaults on insurance premia.