Diego Legal-Canisa Presents JMP at Conferences in the UK and Mexico

Wednesday, December 11, 2019

Between August and November 2019, Diego Legal-Cañisá travelled widely to present  his JMP, titled "Unemployment Insurance with Consumer Bankruptcy," at conferences in the UK (at the Econometric Society European Summer Meeting at the University of Manchester and the 50th Anniversary Conference of the Money, Macro & Finance Research Group at the London School of Economics) and in Mexico (at the Latin American Meeting of the Econometric Society at Benemérita Universidad Autónoma de Puebla). In his paper, Diego quantitatively evaluates how unemployment insurance (UI) affects unsecured credit markets and how the welfare implications of UI depend on consumer bankruptcy. Theoretically, higher UI benefits can reduce default risk since they imply higher income during a situation of low-income. However, they can also reduce precautionary savings, encourage borrowing and unemployment, and require more taxes, which would increase default risk. He starts by comparing bankruptcy rates for bordering counties and exploits policy discontinuities at state borders to identify that bankruptcy rates fall with the maximum amount of UI available. He then constructs a general equilibrium model of unsecured consumer credit and unemployment. The model accounts for the cross-state negative relationship, and he uses it to study changes in the UI replacement rate. For low levels of replacement rate, the model predicts that the first effect dominates, and more UI benefits reduce default risk and increase ex ante welfare. As UI increases, default risk increases, and welfare falls. Bankruptcy is a barrier for the UI to increase welfare. Increasing the replacement rate above the current 50% to 55% would increase welfare by 0.5% if bankruptcy is not available (welfare increases even beyond 60%), but with a bankruptcy option, it reduces welfare by 1.7%.