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Privatizing Public Services and Strategic Behavior: The Impact of Incentives to Reduce Workers’ Compensation Claim Duration

  • Melissa P. McInerney

    ()

    (Department of Economics, College of William and Mary)

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    During the 1990s, the state of Ohio contracted out Workers’ Compensation (WC) case management, incorporating a large bonus payment intended to reward reduced claim duration. The bonus is essentially a decreasing function of average days away from work, excluding claims longer than 15 months. In response, duration is predicted to decrease for claims with moderate injuries and increase for some severe claims so that claimants miss more than 15 months of work and are excluded from the calculation. I find that contractors increased duration for severe claims but no evidence that contractors successfully reduced duration for moderate claims. However, contractors received large bonus payments. This is likely because the financial reward to merely excluding a small share of severe claims from the calculation of the bonus payment is large enough to enable TCMs to receive the full bonus. These contractor responses are inconsistent with state intentions, suggesting public entities should anticipate strategic behavior when crafting performance-based incentives.

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    File URL: http://economics.wm.edu/wp/cwm_wp88rev.pdf
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    Paper provided by Department of Economics, College of William and Mary in its series Working Papers with number 88.

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    Length: 49 pages
    Date of creation: 27 Aug 2009
    Date of revision: 18 Oct 2010
    Handle: RePEc:cwm:wpaper:88
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