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

The Job Training Partnership Act (JTPA) 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 valueadded. 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. Section 1 Introduction While theoretically incentive contracts can create perverse incentives, the empirical understanding of these effects is under-developed. Suppose an educational authority wants to elicit higher teacher effort and therefore bases teachers' salaries upon students' performance. Evidence that those enrolled have higher ability than those eligible for the program is not evidence that teachers substituted better students for more teaching effort. An identification problem exists because differences could simply arise from more intelligent students applying to the program. To solve this identification problem, the researcher needs a variable which exogenously alters the teachers' selection criteria but does not alter the students' propensity to apply to the program. State variation in the implementation of the Job Training Partnership Act (JTPA) provides such an environment thereby allowing tests of problems derived from incentive theory. The JTPA, which replaced its precursor the Comprehensive Employment and Training Act (CETA) in 1982, is the major federal program for providing job training to the poor. Its main innovation over CETA was the introduction of a performance-contingent incentive system. The critical design element in the JTPA system is the selection of standards which reflect policy goals explicitly stated in terms of changes in employment and earnings and a reduction in welfare dependency. However, implementation problems precluded adopting a set of value-added performance measures and instead the standards used in practice only measure levels of employment and earnings following training. Thus, the JTPA problem of how to design incentives when it is difficult to monitor performance is a classic agency problem. Post-training level standards may have several effects. First, they may successfully increase the subcontractors' training efforts and induce them to become more effective teachers. Alternatively, because provider performance is measured by post-training outcomes, a moral hazard problem could exist: training providers may substitute harder-to-train clients with individuals for whom measured performance would be high even in the absence of training. By selecting more able individuals from the applicant pool, these providers may be engaging in a form of "cream-skimming. " Of course, these effects are not mutually exclusive: high effort combined with cream-skimming may lead to providing training to those for whom the value-added is largest. In short, the performance standards adopted may either raise or decrease "the basic return on investment (as) measured by the increased employment and earnings of participants and the reduction in welfare dependency. " See Cragg (1993), Holmstrom and Milgrom (1991) and Baker (1992). 'Section 106 of the Job Training Partnership Act.