Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 2001:20: Optimal Unemployment Insurance with Monitoring and Sanctions

Jan Boone , Peter Fredriksson (), Bertil Holmlund () and Jan van Ours ()
Additional contact information
Jan Boone: Department of Economics, Postal: Tilburg University, Box 90153, 5000 LE Tilburg, The Netherlands
Peter Fredriksson: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Bertil Holmlund: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Jan van Ours: CentER for Economic Research, Postal: Tilburg University, Box 90153, 5000 LE Tilburg, The Netherlands

Abstract: This paper analyzes the design of optimal unemployment insurance in a search equilibrium framework where search effort among the unemployed is not perfectly observable. We examine to what extent the optimal policy involves monitoring of search effort and benefit sanctions if observed search is deemed insufficient. We find that introducing monitoring and sanctions represents a welfare improvement for reasonable estimates of monitoring costs; this conclusion holds both relative to a system featuring indefinite payments of benefits and a system with a time limit on unemployment benefit receipt. The optimal sanction rates implied by our calibrated model are much higher than the sanction rates typically observed in European labor markets.

Keywords: Unemployment insurance; search; sanctions

JEL-codes: J64; J65; J68

30 pages, November 2, 2001

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