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A General Test for Distortions in Performance Measures

Author

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  • Pascal Courty

    (Department of Economics, European University Institute)

  • Gerald Marschke

    (Department of Economics and Department of Public Administration and Policy, University at Albany, State University of New York, NBER, and IZA)

Abstract

Results from the incentive literature suggest that performance measures are often distorted, eliciting dysfunctional and unintended responses. The existence of these responses, however, is difficult to demonstrate in practice because this behavior is typically hidden from the researcher. We present a simple model showing that one can test for the existence of distortions by estimating the change in the association between a performance measure and the true goal of the organization with the measure's introduction. Using data from a public-sector organization, we find evidence consistent with the existence of distortions. We draw implications for the selection of performance measures. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • Pascal Courty & Gerald Marschke, 2008. "A General Test for Distortions in Performance Measures," The Review of Economics and Statistics, MIT Press, vol. 90(3), pages 428-441, August.
    • Handle: RePEc:tpr:restat:v:90:y:2008:i:3:p:428-441
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    Citations

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    Cited by:

    1. Randolph Sloof & Mirjam van Praag, 2015. "Testing for Distortions in Performance Measures: An Application to Residual Income‐Based Measures like Economic Value Added," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 24(1), pages 74-91, March.
    2. McInerney, Melissa, 2010. "Privatizing public services and strategic behavior: The impact of incentives to reduce workers' compensation claim duration," Journal of Public Economics, Elsevier, vol. 94(9-10), pages 777-789, October.
    3. Carolyn J. Heinrich & Gerald Marschke, 2010. "Incentives and their dynamics in public sector performance management systems," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 29(1), pages 183-208.
    4. Gibbs, Michael, 2012. "Design and Implementation of Pay for Performance," IZA Discussion Papers 6322, Institute of Labor Economics (IZA).
    5. Robert Kelchen & Amy Y. Li, 2017. "Institutional Accountability: A Comparison of the Predictors of Student Loan Repayment and Default Rates," The ANNALS of the American Academy of Political and Social Science, , vol. 671(1), pages 202-223, May.
    6. Sloof, Randolph & van Praag, C. Mirjam, 2010. "The effect of noise in a performance measure on work motivation: A real effort laboratory experiment," Labour Economics, Elsevier, vol. 17(5), pages 751-765, October.
    7. Michiel Bijlsma & Pierre Koning & Victoria Shestalova, 2013. "The Effect of Competition on Process and Outcome Quality of Hospital Care in the Netherlands," De Economist, Springer, vol. 161(2), pages 121-155, June.
    8. Sedlmayr, Richard, 2018. "Rewarding Poverty Alleviation: A Case Study in Payment-by-Results," SocArXiv hdr78, Center for Open Science.
    9. Elizabeth Sheedy & Le Zhang & Dominik Steffan, 2022. "Scorecards, gateways and rankings: remuneration and conduct in financial services," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(3), pages 3239-3283, September.

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