Evaluating Performance-Based Contracting in Welfare-to-Work Programs: Selection and Earnings Gain Effects in Wisconsin Works*

The Wisconsin Works (W-2) program, the TANF program in Wisconsin, has introduced performance contracting to align W-2 service providers’ objectives with the state’s goals by establishing financial and administrative incentives. Using individual-level administrative datasets from 1998 to 2005, this study examines whether the introduction and revision of the earnings gain rate standard improved the economic performance of W-2 participants. Results reveal that under exacerbating economic conditions and weakening financial incentives, the adoption of the earnings gain standard had a positive effect on maintaining the earing gain of W-2 participants. However, W-2 agencies responded to the changes in the earnings gain rate standard by controlling the movement of W-2 participants in and out of the program and selecting those who were more likely to be employed. This study discusses a better contract design to improve the effectiveness of the welfare service provision.