DP3082 Optimal Unemployment Insurance with Monitoring and Sanctions

Author(s): Jan Boone , Peter Fredriksson , Bertil Holmlund , Jan C. van Ours

Publication Date: November 2001

Keyword(s): unemployment insurance , search , sanctions

JEL(s): J64 , J65 , J68

Programme Areas: Labour Economics , Public Policy

Link to this Page: www.cepr.org/pubs/dps/DP3082.asp

This Paper 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. The optimal sanction rates implied by our calibrated model are much higher than the sanction rates typically observed in European labour markets