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Presentation-APPAM-Luigjes-Vandenbroucke-14.6.2016

Institutional Moral Hazard in Multi-Tiered Regulation of
Unemployment
Contribution to the session on “Improving income equality through a European unemployment insurance
system”, APPAM conference, London, 14-06-2016
Vandenbroucke & Luigjes
Introduction
 Concept of ‘institutional moral hazard’ (IMH)
 Caveats
 Factors that contribute to its salience
 (Concern for) IMH in the 8 cases
 General & country specific
 Conclusions
 Minimum requirements
 The broader picture: fiscal decentralisation
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IMH: definition
 A situation in which an insured person can affect the insured company’s liability
without its knowledge (Barr, 2004)
 Two levels of government (A & B)
 ‘A’ covers a risk that ‘B’ could cover as well
 Policies by ‘B’ influence incidence of the risk
 Asymmetric information
 Examples
 Dumping, parking, creaming
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IMH: caveats & nuances
 Our scope is limited
 Other factors influence the risk of unemployment
 There is a broader fiscal context
 IMH is inevitable in insurance
 Danger of over-stressing and over-simplifying
 Perceptions matter
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IMH: factors that contribute to its salience
 Design of schemes
 Generosity for individuals, design of re-insurance, other fiscal mechanisms
 Interaction with other parts of the regulation of unemployment
 Activation policies, SA
 Local or regional differences
 Heterogeneity in employment rates, differences w.r.t. policy goals
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IMH in 8 cases: general findings
 Concern for IMH plays/played a role in every case
 However, the extent of (concern for) IMH differs
 IMH takes different forms
 Perverse interactions with other benefits
 Growing heterogeneity between constituent parts of countries
 Different views on policy goals
 Reforms differed as well: centralisation vs decentralisation
 Federal/central take-over, more federal/central control or less re-insurance
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IMH in 8 cases: country specific findings (1)
 US
 UI: federal-state cooperation, FUTA, extended benefits
 SA: move away from open-ended funding (AFDC) to block-grant (TANF)
 GER, CHE, AUT
 Common issue: problematic dichotomy SA and UI (also: dumping)
 Different solutions: federal take-over, federal requirements, closing off UI
 DNK
 Reimbursement model
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IMH in 8 cases: country specific findings (2)
 CAN, BEL
 ‘Classic’ IMH: federal benefits, regional activation
 Difference in salience of IMH in UI, different solutions
 AUS
 ALMPs privatised (no intergovernmental dimension)
 Increasingly strict governmental control
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Conclusions
 Most common forms of IMH
 Poor activation (incentive structure, different views on policy goals)
 Perverse interactions (dumping of caseloads, prioritising other benefits)
 IMH is inevitable
 But it can be mitigated to a certain extent
 Cost-benefit analysis is required
 Complexity of national systems will be a challenge to EUBS
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Conclusions: minimum requirements
 Most likely candidate to mitigate IMH in EUBS: minimum
requirements
 EUBS presupposes minimum requirements
 Two purposes: optimising stabilisation & mitigating IMH
 Minimum requirements best suited for heterogeneous constituent units
 Less intensive than performance measurement
 Stronger centralisation of regulation of unemployment is not an option
 Can build on a precedent in the EU: OMC
 Allows diversity Institutional Moral Hazard in Multi-Tiered Regulation of
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The broader picture: why re-insurance?
1) Stabilisation, risk-pooling, promoting positive externalities
2) Solidarity & unity
3) Lack of fiscal capacity at lower government level
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 Motivations 1 and 2 are likely to lead to less re-insurance than
motivation 3
 Leading to less costly IMH
 Perception of IMH is viewed as a cost of explicit policy goals
The broader picture: understanding responses to IMH
 Motivations 1&2
 Cost-benefit analysis, if IMH is too costly: scaling back/ending re-insurance
 Motivation 3
 Scaling back/ending re-insurance not possible
 More central control
 Incentives, performance measurement, minimum requirements
 Federal/central take-over
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Broader picture: a nexus
 Nexus:
 Re-insurance of subcentral governments
 IMH
 Fiscal autonomy
 Underlying variable: the nature of solidarity
 National solidarity vs regional solidarity
 Interpersonal vs interregional
 Re-distribution vs autonomy
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Fiscal
autonomy
IMH
Reinsurance
Publications
 Via CEPS
 https://www.ceps.eu/publications/institutional-moral-hazardmulti-tiered-regulation-unemployment-and-social-assistance
 Via European Commission
 http://ec.europa.eu/social/main.jsp?catId=738&langId=en&pu
bId=7887&furtherPubs=yes
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Sources
 Barr, N. (2004), Economics of the Welfare State, New York:
Oxford University Press.
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