MORAL HAZARD VERSUS LIQUIDITY AND THE OPTIMAL TIMING OF UNEMPLOYMENT BENEFITS

We develop a novel way of identifying the liquidity and moral hazard effects of unemployment insurance exclusively from how job-finding rates respond to unemployment benefits that vary over an unemployment spell. We derive a sufficient statistics formula for the dynamically optimal level of unemployment benefits based on these two effects. Using a regression kink design (RKD) that simultaneously exploits two kinks in the schedule of unemployment benefits, we apply our method to Spain for the years 1992-2012 and find that moral hazard effects dominated liquidity effects. suggesting that Spanish unemployment benefits exceeded the optimal level in that period.