Introduction of unemployment insurance savings accounts in Chile: Job search, moral hazard and income effects

I study the transition in October 2002 of the Chilean Unemployment Insurance from a system where benefits were financed by the Social Security to one where benefits were financed by individual savings accounts. To that end and to identify a long span of labor transits with reduced measurement errors, I use matched survey and administrative datasets that cover the 1985--2009 period. Hazard rates for leaving unemployment jumped strongly with drops in unemployment benefits and with the proximity to their exhaustion. These spikes are larger after the system transition and when restricting to unemployment spells that terminate in an employment. Dividing the incidence of higher benefits into income (or liquidity) and substitution (or moral hazard) effects, I show that the system transition increased the share of the income effect from a 19% to a 23%. The impact of the transition is limited. However, it provides an alternative to reduce the distortion caused by the social provision of unemployment benefits, while at the same reduces the budget burden on the government.