Unemployment Insurance Fraud and Optimal Monitoring

FRB of St. Louis Working Paper No. 2012-024E

50 Pages Posted: 24 Jul 2012 Last revised: 11 Jun 2014

See all articles by David Fuller

David Fuller

Concordia University, Quebec - Department of Economics

B. Ravikumar

Federal Reserve Bank of Saint Louis

Yuzhe Zhang

Texas A&M University

Date Written: June 10, 2014

Abstract

An important incentive problem for the design of unemployment insurance is the fraudulent collection of unemployment benefits by workers who are gainfully employed. 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 quantitative analysis suggests that the optimal monitoring cost is 60 percent of the cost in the current U.S. system.

Keywords: Unemployment Insurance, Fraud, Concealed Earnings, Costly State Verification

JEL Classification: D82, D86, J65

Suggested Citation

Fuller, David and Ravikumar, B. and Zhang, Yuzhe, Unemployment Insurance Fraud and Optimal Monitoring (June 10, 2014). FRB of St. Louis Working Paper No. 2012-024E. Available at SSRN: https://ssrn.com/abstract=2116703 or http://dx.doi.org/10.2139/ssrn.2116703

David Fuller

Concordia University, Quebec - Department of Economics ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1MB
Canada

B. Ravikumar (Contact Author)

Federal Reserve Bank of Saint Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Yuzhe Zhang

Texas A&M University ( email )

Langford Building A
798 Ross St.
College Station, TX 77843-3137
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
80
Abstract Views
679
rank
307,712
PlumX Metrics