We leverage discontinuities in Poland that quasi-randomly determine unemployment benefit levels and duration. we report three main findings: (1) The distortionary effects of benefit increases are larger than those of cost-equivalent benefit extensions. (2) The distortionary effects of benefit duration and benefit generosity interact: The unemployment effect of generosity nearly doubles when benefit duration is extended. And (3), in addition to delaying re-employment, more generous benefits significantly increase the hazard that employed workers become unemployed. We use the results to build a model of optimal unemployment insurance that accounts for moral hazard among the employed.The results suggest that the total distortion of UI among the employed is larger than that among the unemployed. Accounting for endogenous separations increases the efficiency loss induced by an increase in the benefit level substantially.