Performance incentives in the public sector: Evidence from the Job Training Partnership Act

It is curious that more government programs do not use performance based contracts 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 article 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. This article provides empirical evidence for the notion that unless performance standards are carefully designed, problems of moral hazard may preclude the widespread use of performance incentives in government programs.