Evaluating the Welfare Effects of Extending Unemployment Insurance Benefits : Evidence from Two Natural Experiments

This paper estimates the welfare gain (i.e. ratio of liquidity to moral hazard effect) of extending UI benefits, using two natural experiments in Taiwan: a three-month benefits extension for middle-aged job losers and the introduction of a re-employment bonus. Our strategy exploits the fact that a re-employment bonus affects an individual's search efforts only through the moral hazard effect. Therefore, we recover liquidity effects by estimating the responses of the search effort to a UI extension and a re-employment bonus. We find that the estimated liquidity-to-moral hazard ratio of extending UI benefits is around 3.9, suggesting that the welfare gain of extending potential benefit duration is substantially larger than that of increasing benefit level