1993 Reports

The Impact of Performance Incentives on Providing Job Training to the Poor: The Job Traning Partnership Act (JTPA)

Cragg, Michael

The Job Training Partnership Act (JCPA) uses performance incentives to encourage more efficient provision of services. The incentive mechanism adopted potentially suffers from information problems. Performance standards imperfectly reflect policy goals explicitly stated in terms of changes in employment and earnings. Existing standards measure levels of employment and earnings following training. Therefore, they may induce subcontractors to become more effective teachers or training providers may take advantage of the moral hazard problem associated with not using value-added measures by substituting harder-to-train clients with those more easily placed in high-wage jobs (cream-skimming). This study exploits state level variation in JTPA incentives to examine how training providers respond to the JTPA incentive system. Using a random sample drawn from the National Longitudinal Survey of Youth, the study proceeds in three steps. First, I model the probability that an individual is enrolled in a JTPA training program and find that higher incentives encourage enrollment of individuals with more work experience. This may reflect service providers targeting services to individuals for whom the value added is largest or it may arise from the moral hazard problem. Therefore, I analyze whether value added is higher for more experienced enrollees and whether stronger incentives lead to higher value added. I find support for the existence of moral hazard. However, holding all else equal, stronger incentives increase value added. The study provides strong evidence that non-random selection of participants by administrators is a statistically important effect and adds empirical content to the literature on the use of incentive contracts to resolve principal agent problems.