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Optimal Unemployment Insurance with Monitoring and Sanctions*

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  • *

     We gratefully acknowledge programming assistance from Per Engström as well as useful comments from anonymous referees, David Grubb, Åsa Rosén and seminar participants at IZA, Bonn, Stockholm University, University of Copenhagen, University of Gothenburg and University of Cyprus. Fredriksson and Holmlund acknowledge the financial support from the Swedish Council for Working Life and Social Research. Boone acknowledges the financial support from NWO (grantnumbers 016.025.024 and 453.03.606).

Abstract

This article analyses 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.

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