Informal family insurance and the design of the Welfare State

We study unemployment benefit provision when the family also provides social insurance. In the benchmark case, more generous State transfers crowd out family risk-sharing one-for-one. An extension gives the State an advantage in enforcing transfers through taxes (whereas families rely on self-enforcement). More generous State transfers lead to more than one-for-one reductions in intra-family insurance, so that total transfers to the unemployed fall as the State's generosity increases. This does not imply that the optimal size of the Welfare State is zero. Our results still hold when families are assumed to be better than the State at monitoring job search activities of unemployed.