Abstract

This paper first exploits a "bonus" policy providing low-income workers with cash grants in Brazil to study the effect of liquidity provision on unemployment outcomes. Based on a RD Design, I find that granting unemployed workers with a bonus equal to half of their previous monthly earnings decreases the probability of exiting unemployment within 8 weeks by around 0.65%. Second, by exploiting the UI potential duration schedule, I find that granting workers with an extra month of unemployment benefits decreases the same outcome by 1.9%. Then, theoretical results from Landais (2014) are used to combine these estimates and disentangle liquidity and moral hazard effects of UI. Based on these, I estimate the liquidity-to-moral hazard ratio in Brazil to be as large as 98%, similarly to values previously found in the US. It suggests that, contrary to common belief, providing UI in developing countries with large informal labor markets may yield substantial welfare gains.