Performance Incentives in the Public Sector: Evidence from the Job Training Partnership Act

Abstract

It is curious that more government programs do not use performance-based contacts for human resource-oriented programs. Theoretical explanations for their limited use are that: agents' risk aversion limits the effectiveness of performance incentives, and moral hazard can restrict the efficacy of performance incentives if the performance measures do not fully 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 unless performance standards are carefully designed, problems of moral hazard may preclude the wide-spread use of performance incentives in government programs.

JEL Classification: D82, J31, J45