A Formal Model of a
Performance Incentive System
James J. Heckman
Carolyn J. Heinrich
This chapter presents a model of training center behavior in an environment that includes a generic performance management system for active labor market programs (ALMPs), such as those funded under JTPA and WIA in the United States. The model builds on the work of Heckman, Heinrich, and Smith (2002) and provides more intuition and discussion of the model and its implications, along with some useful extensions.1 Additionally, our model offers an essential conceptual context for the detailed analyses of the JTPA and WIA programs that follow in the remaining chapters of this volume.
The model we develop assumes that training (or workforce development) centers seek to maximize the present discounted value of earnings (or employment) impacts from the services they provide, as well as, potentially, goals related to the characteristics of participants and to the effort levels exerted by program staff.2 The JTPA and WIA programs both have formally stated equity (service to particular subgroups) and efficiency (improving labor market outcomes relative to what would have occurred without the program) goals. Our model demonstrates how these objectives interact with a performance standards system based on short-term outcome measures, and we discuss in detail why all of the performance standards systems we know of rely on performance measures based on outcome levels measured in the short term rather than on impacts (“value added”) over the long run. The use of short-term outcomes as performance measures has the potential to misdirect activity by focusing training center attention on criteria only loosely (or even perversely) related to long-run net benefits, long-run equity criteria, or both. For example, if program activities encourage