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Unemployment insurance fraud and optimal monitoring

  • David L. Fuller
  • B. Ravikumar
  • Yuzhe Zhang

The most prevalent incentive problem in the U.S. unemployment insurance system is that individuals collect unemployment benefits while being gainfully employed. We show how the unemployment insurance authority can efficiently use a combination of tax/subsidy and monitoring to prevent such fraud. The optimal policy monitors the unemployed at fixed intervals. Employment tax is nonmonotonic: it increases between verifications but decreases after a verification. Unemployment benefits are relatively flat between verifications but decrease sharply after a verification.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2012-024.

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Date of creation: 2012
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Handle: RePEc:fip:fedlwp:2012-024
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  1. Zhang, Yuzhe, 2009. "Dynamic contracting with persistent shocks," Journal of Economic Theory, Elsevier, vol. 144(2), pages 635-675, March.
  2. Álvarez-Parra, Fernando & Sánchez, Juan M., 2009. "Unemployment insurance with a hidden labor market," Journal of Monetary Economics, Elsevier, vol. 56(7), pages 954-967, October.
  3. Ravikumar, B & Zhang, Yuzhe, 2010. "Optimal auditing in a dynamic model of tax compliance," MPRA Paper 22924, University Library of Munich, Germany.
  4. Pavoni, Nicola, 2007. "On optimal unemployment compensation," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1612-1630, September.
  5. Setty, Ofer, 2009. "Optimal Unemployment Insurance with Monitoring," MPRA Paper 18188, University Library of Munich, Germany.
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