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Performance Incentives with Award Constraints

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  • Pascal Courty
  • Gerald Marschke

Abstract

This paper studies the provision of incentives in a large government organization that is divided into independent pools of agencies. Each pool distributes performance awards to the agencies it supervises, subject to two constraints: the awards cannot be negative and the sum of the awards cannot exceed a fixed budget. The theory shows that the constraints on the award distribution bind for pools that are heterogeneous enough, resulting in inefficiencies. The empirical analysis presents conflicting evidence in light of the theory. A possible explanation is that the award designers may have additional objectives in addition to effort maximization.

Suggested Citation

  • Pascal Courty & Gerald Marschke, 2002. "Performance Incentives with Award Constraints," Journal of Human Resources, University of Wisconsin Press, vol. 37(4), pages 812-845.
    • Handle: RePEc:uwp:jhriss:v:37:y:2002:i:4:p:812-845
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    References listed on IDEAS

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    1. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-864, October.
    2. Edward P. Lazear, 2000. "Performance Pay and Productivity," American Economic Review, American Economic Association, vol. 90(5), pages 1346-1361, December.
    3. Demski, Joel S. & Sappington, David E. M. & Spiller, Pablo T., 1988. "Incentive schemes with multiple agents and bankruptcy constraints," Journal of Economic Theory, Elsevier, vol. 44(1), pages 156-167, February.
    4. Heckman, James J & Heinrich, Carolyn & Smith, Jeffrey, 1997. "Assessing the Performance of Performance Standards in Public Bureaucracies," American Economic Review, American Economic Association, vol. 87(2), pages 389-395, May.
    5. Son Ku Kim, 1997. "Limited Liability and Bonus Contracts," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 899-913, December.
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    Cited by:

    1. Atkinson, Adele & Burgess, Simon & Croxson, Bronwyn & Gregg, Paul & Propper, Carol & Slater, Helen & Wilson, Deborah, 2009. "Evaluating the impact of performance-related pay for teachers in England," Labour Economics, Elsevier, vol. 16(3), pages 251-261, June.
    2. Peter Z. Schochet & John A. Burghardt, 2008. "Do Job Corps performance measures track program impacts?," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 27(3), pages 556-576.
    3. Huping Shang & Hongmei Liu & Wei Liu, 2024. "Unveiling the origins of non-performance-oriented behavior in China’s local governments: a game theory perspective on the performance-based promotion system," Palgrave Communications, Palgrave Macmillan, vol. 11(1), pages 1-11, December.

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    More about this item

    JEL classification:

    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital

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