“A Precautionary Tale: Unemployment Insurance Policy with Concealed Earnings” with David Fuller, M. Ryan Haley (2023)

In this paper we analyze the provision of unemployment insurance in an environment with unobservable employment status and unobservable job offers.  We examine US data characterizing the prevalence of overpayments from concealed earnings fraud and rejection of suitable offers (moral hazard), and calibrate a model to match this data.  There exist 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 benefits, the average duration of unemployment decreases.  We calculate that actual occurrences of unemployment insurance fraud amount to 10% of total benefits paid and reduce welfare by around 1%.  We also find the economy is better off relying on minimal welfare payments instead of the current U.S. system of unemployment benefits.

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