Grace Bagwell

Bounded rationality and discrimination? An investigation of systematic errors in UI payments

Simon (1947) posits that bureaucrats are limited by the constraints of time and cognitive abilities, and are thus forced to make “boundedly rational” decisions.   More recently, prospect theory (Kahneman & Tversky, 1979) identifies systematic biases in decisions under conditions of risk and uncertainty.  These theories suggest that bureaucrats may develop systematic biases for specific groups of people because of suboptimal decision making.  Coupling these theoretical frameworks with O’Toole and Meier’s model linking management and performance, this paper seeks to explain how systematic biases in decision making might lead to errors in organizational performance.

Using data from the U.S. Department of Labor’s Benefit Accuracy Measurement (BAM) Program from 2002 through 2011, we seek to understand the determinants of systematic errors in payments to Unemployment Insurance (UI) claimants.  Previous research (Ryu, Wenger, & Wilkins 2012) has found systematic errors in denied claims, but we have found no research that has been conducted on improper payments to program beneficiaries.  Improper payments are defined as both overpayments and underpayments to UI claimants.

Thus far the BAM data have been underutilized, but provide a rich set of variables at the state and individual claimant level.  These data will allow us to investigate the relationship among state level measures, individual characteristics, and improper payments.  We estimate our models using the detection control estimation technique, which allows us to predict the true error rate based on annual audit measures in the BAM.  Based on previous research, we predict improper payments in part are a function of state level implementation decisions and also individual claimant characteristics.