Contracting-Out of Assistance to the Unemployed : Implications of the Australian Experiment

The present paper models the behaviour of the unemployed and welfare organisations under contracting. Quality of service is observed by the unemployed, not the government, but quality signals extracted from participation choices allow the socially optimal contract price and program size to be calculated. A political equilibrium program size exists where the median employed voter weighs net taxation cost against the value of assistance should they become unemployed. Programs can be supported even in the absence of risk aversion or altruism. Comparative static responses of program size to various labour market parameters are examined