Performance Incentives in Government Subcontracting: Evidence from the Job Training Partnership Act (JTPA)
It is curious that more government programs do not use performance based subcontracts for human resource oriented programs. Theoretical explanations for their limited use are that: agents' risk aversion to idiosyncratic variation in compensation beyond their control constrains the effectiveness of performance incentives; and, moral hazard can restrict the efficacy of performance incentives if the performance measures do not perfectly reflect program goals. This paper examines the validity of these explanations by studying the performance management system used in the major federal job training program, the Job Training Partnership Act (JTPA). Existing JTPA performance measures lead to problems of moral hazard. The paper provides empirical evidence for the notion that problems of moral hazard preclude the wide-spread use of performance incentives in government programs.
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