The Dilemma of Delegating Search: Budgeting in Public Employment Service

The Recent German research has suggested that extending the number of caseworkers may have a very positive effect on PES performance. The present paper accepts this key insight but argues that there are other factors that may independently drive outcomes and in particular local agents’ discretion. That is, it focuses on the delegation problem between the central office and the local job center ‘matchmakers.’ Because their (search) effort in contacting employers and collecting data is not verifiable by the central authority, a typical moral hazard problem can arise. To overcome the delegation problem and provide high‐powered incentives for increased levels of search effort on the part of job centers, we propose output‐related schemes that assign greater staff capacity to agencies achieving high strike rates.