Optimal Monitoring and Sanction Systems

Many countries rely on monitoring of jobseekers and benefit sanctions in case of noncompliance with job search requirements to encourage job search and to prevent abuse of the social insurance system. However, so far only little is known about the optimal design of monitoring and sanction systems. In a model with worker heterogeneity and endogenous policy choice for each period in the unemployment spell I derive the optimal size of a benefit sanction and characterize the optimal monitoring intensity. I show that, in contrast to what most of the literature assumes when modeling monitoring and sanctions, the optimal sanction is a temporary cut in benefits to zero and that the optimal monitoring intensity depends on worker characteristics and potentially on unemployment duration. In particular, if the returns to search decline during unemployment, e.g. because of human capital depreciation, it is (ceteris paribus) optimal to increase the monitoring intensity with increasing unemployment duration. Based on a simulation I further characterize optimal monitoring and sanction systems as a function of worker characteristics, unemployment duration, monitoring costs, wage dispersion and labor market conditions.