Policy Documents

A Quantitative Analysis of Unemployment Insurance in a Model with Fraud and Moral Hazard

David L. Fuller –
February 21, 2011

In this paper I analyze the provision of unemployment insurance in an environment with unobservable job offers and unobservable employment status. Both rejection of suitable offers and unreported employment income represent unemployment insurance fraud. I analyze US data characterizing the prevalence of both types of fraud, and calibrate a model to match this data. I find novel implications from including fraud from unobservable employment status. For small increases in the benefit level (10%) the model is consistent with micro evidence on duration elasticities; however, larger increases in the benefit level decrease the unemployment rate and durations. Similarly, for a range of increases in the potential duration of benefit, the average duration of unemployment decreases. I calculate that actual occurrences of unemployment insurance fraud amount to 10% of total benefit paid and reduce welfare by around 1%. I also find the economy is better off relying on minimal welfare payments instead of the current U.S. system of unemployment benefits.