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Auctioning incentive contracts; application to welfare-to-work programs

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  • Pierre Koning

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  • S. Onderstal

Abstract

This paper applies the theory of auctioning incentive contracts to welfare-to-work programs. In several countries, the government procures welfare-to-work projects to employment service providers. In doing so, the government trades off adverse selection (the winning provider is not the most efficient one) and moral hazard (the winning provider shirks in his effort to reintegrate unemployed people). We compare three simple auctions with the socially optimal mechanism and show that two of these auctions approximate the optimal mechanism if the number of providers is large. Using simulations, we observe that competition between three bidders is already sufficient for the outcome of these auctions to reach 95% of the optimal level of social welfare.

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Bibliographic Info

Paper provided by CPB Netherlands Bureau for Economic Policy Analysis in its series CPB Discussion Paper with number 38.

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Date of creation: Aug 2004
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Handle: RePEc:cpb:discus:38

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References

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  1. Ken Binmore & Paul Klemperer, 2001. "The Biggest Auction Ever: the Sale of the British 3G Telecom Licenses," Economics Papers 2002-W4, Economics Group, Nuffield College, University of Oxford, revised 01 Sep 2001.
  2. Ballard, Charles L & Shoven, John B & Whalley, John, 1985. "General Equilibrium Computations of the Marginal Welfare Costs of Taxes in the United States," American Economic Review, American Economic Association, vol. 75(1), pages 128-38, March.
  3. Klemperer, Paul, 1999. " Auction Theory: A Guide to the Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 13(3), pages 227-86, July.
  4. Roger B. Myerson, 1978. "Optimal Auction Design," Discussion Papers 362, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Productivity Commission, 2002. "Independent review of the Job Network," Labor and Demography 0210002, EconWPA.
  6. Riley, John G & Samuelson, William F, 1981. "Optimal Auctions," American Economic Review, American Economic Association, vol. 71(3), pages 381-92, June.
  7. Ludo Struyven & Geert Steurs, 2003. "The Competitive Market for Employment Services in the Netherlands," OECD Social, Employment and Migration Working Papers 13, OECD Publishing.
  8. R. Preston McAfee & John McMillan, 1987. "Competition for Agency Contracts," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 296-307, Summer.
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Cited by:
  1. Onderstal, Sander, 2009. "Bidding for the unemployed: An application of mechanism design to welfare-to-work programs," European Economic Review, Elsevier, vol. 53(6), pages 715-722, August.

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