Auctioning incentive contracts; application to welfare-to-work programs
AbstractThis 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 InfoPaper provided by CPB Netherlands Bureau for Economic Policy Analysis in its series CPB Discussion Paper with number 38.
Date of creation: Aug 2004
Date of revision:
Find related papers by JEL classification:
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- J68 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Public Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-12-12 (All new papers)
- NEP-CMP-2004-12-12 (Computational Economics)
- NEP-MIC-2004-12-12 (Microeconomics)
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