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Unemployment Insurance Fraud and Optimal Monitoring

Author

Listed:
  • Yuzhe Zhang

    (Texas A&M University)

  • B Ravikumar

    (Federal Reserve Bank of St Louis)

  • David Fuller

    (Concordia University)

Abstract

We present evidence that fraudulent collection of unemployment benefits by workers who are gainfully employed is the most relevant incentive problem for the design of unemployment insurance. We show how to 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. Our preliminary quantitative analysis indicates that the present value of auditing costs are less than 50% of the cost in the current U.S. system. For the average worker, the optimal contract can deliver the same utility as the U.S. system at less than 1/4 the cost.

Suggested Citation

  • Yuzhe Zhang & B Ravikumar & David Fuller, 2014. "Unemployment Insurance Fraud and Optimal Monitoring," 2014 Meeting Papers 1191, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:1191
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    Citations

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    Cited by:

    1. Cristina LINCARU & Speranta PÎRCIOG & Draga Atanasiu, 2016. "A Model Of A System Of Monitoring And Alert System Of The Risk Of Unemployment – Romanian Case," Regional Science Inquiry, Hellenic Association of Regional Scientists, vol. 0(3), pages 125-145, December.
    2. Cristina LINCARU & Speranta PÃŽRCIOG & Draga Atanasiu, 2016. "A Model Of A System Of Monitoring And Alert System Of The Risk Of Unemployment €“ Romanian Case," Regional Science Inquiry, Hellenic Association of Regional Scientists, vol. 0(3), pages 125-145, December.
    3. Long, Iain W. & Polito, Vito, 2015. "Cash-in-Hand, Benefit Fraud and Unemployment Insurance," Cardiff Economics Working Papers E2015/4, Cardiff University, Cardiff Business School, Economics Section.
    4. Stéphane Auray & David L. Fuller, 2020. "Eligibility, experience rating, and unemployment insurance take‐up," Quantitative Economics, Econometric Society, vol. 11(3), pages 1059-1107, July.
    5. David L. Fuller & B. Ravikumar & Yuzhe Zhang, 2015. "Unemployment Insurance Fraud and Optimal Monitoring," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(2), pages 249-290, April.
    6. Auray, Stéphane & Fuller, David L. & Lkhagvasuren, Damba, 2019. "Unemployment insurance take-up rates in an equilibrium search model," European Economic Review, Elsevier, vol. 112(C), pages 1-31.
    7. Georges Dionne, 2012. "The empirical measure of information problems with emphasis on insurance fraud and dynamic data," Working Papers 12-10, HEC Montreal, Canada Research Chair in Risk Management.
    8. Martin Gervais & Lawrence Warren & Reza Boostani, 2022. "Optimal unemployment insurance in a directed search model," Economic Inquiry, Western Economic Association International, vol. 60(4), pages 1473-1496, October.
    9. Martin Gervais & Roozbeh Hosseini & Lawrence Warren, 2025. "Unemployment Insurance, Wage Pass-Through, and Endogenous Take-Up," Working Papers 25-59, Center for Economic Studies, U.S. Census Bureau.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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