Employment turnover and the public allocation of unemployment insurance
Unemployment benefits are higher and turnover between unemployment and employment is lower in Europe than in the U.S. We model the political determination of the unemployment insurance to explain these differences. We show that saving and borrowing is a good substitute for unemployment insurance when turnover is high. With high turnover, the median voter thus prefers low unemployment insurance. With low turnover, generous unemployment insurance becomes more valuable. If the median voter cannot bind future voters, the voting cycle must, however, be long in order to support a high level of insurance. Endogenizing turnover produces the possibility of multiple political equilibria.