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Optimal Unemployment Insurance with Monitoring

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  • Setty, Ofer

Abstract

Monitoring the job-search activities of unemployed workers is a common government intervention. Typically, a caseworker reviews the unemployed worker's employment contacts at some frequency, and applies sanctions if certain requirements are not met. I model monitoring in the optimal unemployment insurance framework of Hopenhayn and Nicolini (1997), where job-search effort is private information for the unemployed worker. In the model, monitoring provides costly information upon which the government conditions the unemployment benefits. In the optimal monitoring scheme, endogenous sanctions and rewards, together with random monitoring, create effective job-search incentives for the unemployed worker. I calibrate the model to the US economy and find that the addition of optimal monitoring to the optimal unemployment insurance scheme decreases the variance of consumption by about two thirds and eliminates roughly half of the government's cost. I also find that compared with the optimal monitoring scheme, US states monitor too much and impose the sanctions over too short a time span. For the US on average, shifting to the optimal monitoring policy would generate savings of about $500 per unemployment spell.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 18188.

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Date of creation: 06 Jan 2009
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Handle: RePEc:pra:mprapa:18188

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Keywords: Recursive Contracts; Unemployment Insurance; Job Search Monitoring;

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References

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  1. Gerard J. van den Berg & Bas van der Klaauw & Jan C. van Ours, 1998. "Punitive Sanctions and the Transition Rate from Welfare to Work," Tinbergen Institute Discussion Papers 98-076/3, Tinbergen Institute.
  2. Denis Fougère & Jacqueline Pradel & Muriel Roger, 2005. "Does Job-Search Assistance Affect Search Effort and Outcomes ? A Microeconometric Analysis of Public Versus Private Search Methods," Working Papers, Centre de Recherche en Economie et Statistique 2005-33, Centre de Recherche en Economie et Statistique.
  3. Jaap H. Abbring & Gerard J. Berg & Jan C. Ours, 2005. "The Effect of Unemployment Insurance Sanctions on the Transition Rate from Unemployment to Employment," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 115(505), pages 602-630, 07.
  4. Jan Boone & Peter Fredriksson & Bertil Holmlund & Jan C. van Ours, 2007. "Optimal Unemployment Insurance with Monitoring and Sanctions," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 117(518), pages 399-421, 03.
  5. Atila Abdulkadiroglu & Burhanettin Kuruscu & Aysegul Sahin, 2002. "Unemployment Insurance and the Role of Self-Insurance," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(3), pages 681-703, July.
  6. van den Berg, Gerard J & van der Klaauw, Bas, 2001. "Counselling and Monitoring of Unemployed Workers: Theory and Evidence from a Controlled Social Experiment," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2986, C.E.P.R. Discussion Papers.
  7. Hopenhayn, H. & Nicolini, P.J., 1996. "Optimal Unemployment Insurance," RCER Working Papers 421, University of Rochester - Center for Economic Research (RCER).
  8. van den Berg, Gerard J, 1994. "The Effects of Changes of the Job Offer Arrival Rate on the Duration of Unemployment," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 12(3), pages 478-98, July.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Optimal unemployment insurance monitoring
    by Economic Logician in Economic Logic on 2009-11-30 15:12:00
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Cited by:
  1. B. Cockx & M. Dejemeppe & A. Launov & B. Van Der Linden, 2011. "Monitoring, Sanctions and Front-Loading of Job Search in a Non-Stationary Model," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium, Ghent University, Faculty of Economics and Business Administration 11/761, Ghent University, Faculty of Economics and Business Administration.
  2. Nicola Pavoni & Ofer Setty & Giovanni L. Violante, 2013. "Search and Work in Optimal Welfare Programs," NBER Working Papers 18666, National Bureau of Economic Research, Inc.
  3. David L. Fuller & B. Ravikumar & Yuzhe Zhang, 2012. "Unemployment insurance fraud and optimal monitoring," Working Papers, Federal Reserve Bank of St. Louis 2012-024, Federal Reserve Bank of St. Louis.
  4. Ofer Setty: Tel Aviv University, 2011. "Unemployment Accounts," 2011 Meeting Papers 204, Society for Economic Dynamics.

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  1. Economic Logic blog

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