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Myopia, Fiscal Federalism, and Unemployment Insurance: Time to Reform UI Financing
Abstract
As commentators and Congress have recognized, the U.S. system of financing its unemployment insurance program is seriously dysfunctional. Extant reform proposals, however, do not fully diagnose the causes of current failures. In particular, other commentators neglect the role of fiscal myopia in state officials’ failures to save for future UI needs. For instance, reformers mostly propose offering rewards or penalties that will take effect only far in the future. These incentives have only small effects on myopic officials.
I show here with a simple model of time-inconsistent preferences that alternative mechanisms (detailed herein) that would offer immediate incentives would be considerably more cost-effective. This result also implies that the chance to forgive current state debts to the federal government represents an irreplaceable opportunity to leverage ex ante incentives; Congress should not forgive these debts without demanding significant state progress towards future stability.
... Cremer and Roeder (2013) justify the social provision of public LTC risk insurance or the subsidize of private insurance with a model that considers myopia and actuarially non-fare loading-costs. Galle (2012) shows through a model that decisions benefiting public unemployment insurance are wounded by myopia, and that immediate incentive could make those decisions more common. ...
This paper reviews the puzzles of insurance demand, and provides an overview of behavioural-based explanations on the concept of underinsurance. In particular, the study outlines the biases (among myopia, narrow framing and others) that help to explain the existence of those puzzles. The results indicate that biases do motivate the chances of underinsurance through sub-optimal probability weighting or wrong probability estimation of risks. We discuss that the literature has fallen short in providing possible solutions for the puzzles, with this study proposing financial literacy treatments, that aim at improving knowledge and use of finance, as a systematic solution.
A considerable body of work in political science is built upon the assumption that politicians are more purposive, strategic decision makers than the citizens who elect them. At the same time, other work suggests that the personality profiles of office seekers and the environment they operate in systematically amplifies certain choice anomalies. These contrasting perspectives persist absent direct evidence on the reasoning characteristics of representatives. We address this gap by administering experimental decision tasks to incumbents in Belgium, Canada, and Israel. We demonstrate that politicians are as or more subject to common choice anomalies when compared to nonpoliticians: they exhibit a stronger tendency to escalate commitment when facing sunk costs, they adhere more to policy choices that are presented as the status-quo, their risk calculus is strongly subject to framing effects, and they exhibit distinct future time discounting preferences. This has obvious implications for our understanding of decision making by elected politicians.
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