Privatizing Public Services and Strategic Behavior: The Impact of Incentives to Reduce Workers’ Compensation Claim Duration

Melissa McInerney

No 88, Working Papers from Department of Economics, College of William and Mary

Abstract: During the 1990s, the state of Ohio contracted out Workers’ Compensation (WC) case management, incorporating a large bonus payment intended to reward reduced claim duration. The bonus is essentially a decreasing function of average days away from work, excluding claims longer than 15 months. In response, duration is predicted to decrease for claims with moderate injuries and increase for some severe claims so that claimants miss more than 15 months of work and are excluded from the calculation. I find that contractors increased duration for severe claims but no evidence that contractors successfully reduced duration for moderate claims. However, contractors received large bonus payments. This is likely because the financial reward to merely excluding a small share of severe claims from the calculation of the bonus payment is large enough to enable TCMs to receive the full bonus. These contractor responses are inconsistent with state intentions, suggesting public entities should anticipate strategic behavior when crafting performance-based incentives.

Keywords: Workers' Compensation; Contracting Out; Privatization (search for similar items in EconPapers)
JEL-codes: H72 J28 L33 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2009-08-27, Revised 2010-10-18
New Economics Papers: this item is included in nep-cse and nep-lab
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http://economics.wm.edu/wp/cwm_wp88rev.pdf (application/pdf)

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Journal Article: Privatizing public services and strategic behavior: The impact of incentives to reduce workers' compensation claim duration (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:cwm:wpaper:88

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