Contracting Welfare-to-work Services: Use and Usefulness

This paper contributes to the broad literature on public services contracting in two ways. First, we provide an empirical analysis of contracting decisions in the provision of welfare-to-work (WTW) services. We estimate both the WTW-contracting decisions of Dutch municipalities and their impact on the performance, measured as the fraction of Social Assistance (SA) recipients. Second, we explicitly model two forms of external provision of WTW services by municipalities: contracting with other municipalities and/or contracting out services to private providers. Our findings suggest that contracting decisions are predominantly driven by cost considerations, both for the decision to contract with other municipalities and the share of contracting out to private providers. Municipalities with low WTW budgets or facing budget constraints are more likely to contract with external parties—presumably this reduces their costs as well as the risk of future cost deficits. We do not find contracting decisions to affect the performance of municipalities, measured as the use, inflow, or outflow out of the SA scheme. From this alone, however, we cannot conclude that the three provision modes are equally cost-effective too, as external provision may be less costly.