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

Author

Listed:
  • Pierre Koning

    (CPB Netherlands Bureau for Economic Policy Analysis)

  • 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.

Suggested Citation

  • Pierre Koning & S. Onderstal, 2004. "Auctioning incentive contracts; application to welfare-to-work programs," CPB Discussion Paper 38, CPB Netherlands Bureau for Economic Policy Analysis.
  • Handle: RePEc:cpb:discus:38
    as

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    File URL: http://www.cpb.nl/sites/default/files/publicaties/download/auctioning-incentive-contracts-application-welfare-work-programs.pdf
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    References listed on IDEAS

    as
    1. Riley, John G & Samuelson, William F, 1981. "Optimal Auctions," American Economic Review, American Economic Association, vol. 71(3), pages 381-392, June.
    2. Roger B. Myerson, 1978. "Optimal Auction Design," Discussion Papers 362, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    3. Klemperer, Paul, 1999. " Auction Theory: A Guide to the Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 13(3), pages 227-286, July.
    4. Ken Binmore & Paul Klemperer, 2002. "The Biggest Auction Ever: the Sale of the British 3G Telecom Licences," Economic Journal, Royal Economic Society, vol. 112(478), pages 74-96, March.
    5. Productivity Commission, 2002. "Independent review of the Job Network," Labor and Demography 0210002, EconWPA.
    6. 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 128-138, March.
    7. Krishna, Vijay, 2009. "Auction Theory," Elsevier Monographs, Elsevier, edition 2, number 9780123745071.
    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.
    9. Ludo Struyven & Geert Steurs, 2003. "The Competitive Market for Employment Services in the Netherlands," OECD Social, Employment and Migration Working Papers 13, OECD Publishing.
    Full references (including those not matched with items on IDEAS)

    Citations

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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.

    More about this item

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - 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

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