Notes on Moral Hazard

policy research

Review of research on moral hazard in contracting employment services

Moral hazard in ALMPs

Principal-agent theory and moral hazard

1. Incentive mechanisms

2. Information mechanisms

3. Control mechanisms

Special expertise

Highlights

“which governance mechanisms are most suitable for the contracting-out of public employment services” (Bruttel :46)

“incentives, information, and control” (Bruttel :46)

“incentives focus mainly on the optimal design of payment structures, information mechanisms usually make use of performance benchmarking and monitoring to increase the public purchaser’s knowledge about the private providers” (Bruttel :46)

“First” - “control mechanisms are defined as extensive rules and regulations that state in great detail how providers have to deliver their services.” (Bruttel :46)

“Second” - “Principal-agent theory” - “Its main focus is on the dilemma of how to make an agent (e.g. an employee or contractor) act in the interest of the principal (e.g. an employer or purchaser)” (Bruttel :47)

“public purchaser is unable to observe the actions that a contracted private provider undertakes” - “developing governance structures that allow for a solution or at least an attenuation of this trade-off” (Bruttel :48)

“moral hazard” - “agents which maximize their own utility to the detriment of that of the principal in situations in which their actions cannot be fully observed” (Bruttel :48)

“three” - “incentive mechanisms” - “performance-based payments” (Bruttel :48)

“the deficiencies of past contracting arrangements often were due to a reliance on one mechanism and a failure to understand the interdependence of all three” (Bruttel :49)

“Employment Service Areas” (Bruttel :50)

“selection of providers is based on two criteria: the capacity to deliver services (40%) and the capacity to achieve outcomes (60%). The capacity to deliver services is mainly an input-related factor” (Bruttel :50)

“the capacity to achieve outcome is mainly a quantitative factor that takes into account past performance” (Bruttel :50)

“providers have a Job Seeker Account at their disposal, which is a budget that varies according to the status of”highly disadvantaged" and locational disadvantage and includes up to $1,150 for the first ISca period and up to $639 for the second ISca period, which starts after 24 months of unemploymen" (Bruttel :51)

“there is a training account of up to $584 which is available for older jobseekers and indigenous jobseekers” (Bruttel :51)

“Because the public vacancy database depends exclusively on input from the providers (and employers), providers are paid a job placement fee (up to $401) if a jobseeker is placed in a vacancy that was listed on the national vacancy database by the provider.” (Bruttel :51)

“outcome-related payments are the single most important governance mechanism to align the interests of the private providers with those of the public purchaser” - “Thus, providers face constant marginal incentives because the award function is linear, like that in a piece-rate compensation function” (Bruttel :54)

“the trade-off between optimal incentive contracts and the risk aversion of the providers” - “Former indicators for controlling were often related to inputs” (Bruttel :56)

“Employment durations of 13 and 26 weeks have emerged internationally as major milestones because they are useful indicators” (Bruttel :56)

“Hence, the greater their contribution to the placement of a jobseeker; the higher their payment should be. However, it is very difficult to measure the net impact of treatment on an individual client.” - “However, by only taking into account the gross results, the government implicitly assumes that the impact is constant for all jobseekers.” (Bruttel :58)

“differentiate payments according to target groups” (Bruttel :58)

“Kansmeter” (Bruttel :58)

“Major problems are that clients do not reveal their true situation because benefit assessment and profiling are carried out in the same interview, and that the time frame is too limited” - “there is also a structural problem in that the target groups are defined very broadly and in many cases are not optimally linked to the profiling instruments” (Bruttel :58)

“Following this assessment, the number of monitoring visits is fixed and may vary from one per year to up to four and more if it is a new site from a new provider or if problems have occurred in the past” (Bruttel :60)

“The basic trade-off is between the higher accountability of providers for their outcomes on the one hand and the freedom that they want to have in order to achieve these outcomes given their greater responsibilities” - “(in particular financial responsibilities) on the other hand.” (Bruttel :62)

Institutional moral hazard in Australia PES

Findings

Bruttel, Oliver. 2005. “Contracting-Out and Governance Mechanisms in the Public Employment Service.” Working Paper SP I 2005-109. WZB Discussion Paper. https://www.econstor.eu/handle/10419/44013.

Luigjes, Chris, and Frank Vandenbroucke. 2015. “Institutional Moral Hazard in the Multi-Tiered Regulation of Unemployment in Australia - Background Paper.” SSRN Scholarly Paper ID 2958261. Rochester, NY: Social Science Research Network. https://papers.ssrn.com/abstract=2958261.

References

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