Unemployment Insurance Fraud and Optimal Monitoring

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 at between verifications but decrease sharply after a verification. JEL Classification Numbers: D82, D86, J65. Keywords and Phrases: Unemployment Insurance, Fraud, Concealed Earnings, Costly State Verification.