Abstract

This paper models welfare-to-work programs as contracts offered by the principal/government to unemployed agents in an environment with moral hazard. A welfare-to-work program comprises of several policy instruments (e.g., job-search, assisted search, mandated work) the principal can use, in combination with welfare benefits, in order to minimize the costs of delivering promised utility to the agent. The generosity of the program and the skill level of the unemployed agent determine the optimal policy instrument to be implemented. Restricting attention to ‘soft programs’ — contracts that make no use of punishments or sanctions — allows a fully analytical characterization of the optimal program and, in addition, it makes the solution robust to hidden saving.

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