Auctioning incentive contracts; application to welfare-to-work programs

This paper applies the theory of auctioning incentive contracts to welfare-to-work programs. In several countries, the government procures welfare-to-work projects to employment service providers. In doing so, the government trades off adverse selection (the winning provider is not the most efficient one) and moral hazard (the winning provider shirks in his effort to reintegrate unemployed people). We compare three simple auctions with the socially optimal mechanism and show that two of these auctions approximate the optimal mechanism if the number of providers is large. Using simulations, we observe that competition between three bidders is already sufficient for the outcome of these auctions to reach 95% of the optimal level of social welfare.

Mechanism design: theory and application to welfare-to-work programs

In October 2007, Leonid Hurwicz , Eric Maskin, and Roger Myerson won the Nobel Prize in Economic Sciences "for having laid the foundations of mechanism design theory". My aim is to give you a flavor of what mechanism design theory is and how we can apply it in practice. More in particular, I will apply insights from the theory to the design of welfare-to-work markets, i.e., markets in which governments contract firms in order to help unemployed people finding a job

Team incentives in public organisations; an experimental study

Using a simple production game, we investigate whether public firms perform better when they increase the power of their workersââ¬â¢ incentive schemes. In a laboratory experiment, subjects choose between a ‘public firm’ and a ‘private firm’ with team and individual incentives, respectively. When exposed to individual incentives, workers in the public firm increase effort in one parametrisation, but show a decrease in another. One reason for the latter observation is that reciprocators self-select in the public firm, rendering cooperation profitable.

Collusion and the choice of auction: an experimental study

We experimentally examine the collusive properties of two commonly used auctions: the English auction (EN) and the first-price sealed-bid auction (FPSB). In theory, both tacit and overt collusion are always incentive compatible in EN while both can be incentive compatible in FPSB if the auction is repeated and bidders are patient enough. We find that the auctions do not differ in subjects’ propensity to collude overtly and in the likelihood that subjects defect from a collusive agreement. Moreover, the average winning bid does not differ between the auctions unless subjects can collude overtly. Under overt collusion, stable cartels buy at a lower price in EN than in FPSB resulting in a lower average winning bid in EN

Tight oligopolies: in search of proportionate remedies

Tight oligopolies are oligopolies the market characteristics of which facilitate the realisation of supranormal profits for a substantial period of time. We entangle the link between market structure and the possibility of welfare reducing behaviour by firms. A useful distinction can be made between ‘unilateral effects' (oligopolistic firms realise supra-normal profits without co-ordinating their strategies) and ‘co-ordinated effects' (oligopolistic firms realise supra-normal profits by co-ordinating their strategies). The study develops a ‘diagnostic approach', a tool that helps policy makers find proportionate remedies to tight oligopolies: (1) ‘prevent' a market from becoming a tight oligopoliy; (2) ‘cure' a currently tight oligopoly by changing the market structure; and (3) treat the symptoms of an established tight oligopoly. We apply this diagnostic approach to six cases of (potentially) tight oligopolies.