Motivation, incentives and perf ormance in the public sector [629609]

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Motivation, incentives and perf ormance in the public sector

Agnès Festré
GREDEG
250 avenue Albert Einstein
0650 Valbonne
France
[anonimizat]
and
Pierre Garrouste
CES
106-112 boulevard de l’hôpital
75013 Paris
France
[anonimizat]

Preliminary draft: June 2008

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Introduction
A now important literature has investigated a nd still investigates th e relationships between
motivation, incentives and effort. Even if there is still some reluctance to address this issue,
there is an agreement on the fact that incentives are not always enhancing effort. Different
explanations have been pointed out both in economics and psychology1. There is however a
less important but fast growing literature concerning the links between motivation, incentives
and effort in the public sector . Basically, this literature has grown out of the movement for
undertaking reforms in most OECD countries in order to render their public sector more
efficient and want to more precisely meas ure the performance of their public activities2. In
fact, the current c ontributions in this field of research can be classified into two main
categories. The first deals with the defini tion of principles (mainly methodological)
concerning measurement of performance within the public sector (A tkinson, 2005; Bureau
and Mougeot, 2007). The second is concerned with the analysis of the relations hips between
incentives and performan ce in the public sector3. These two frames are not independent and
equally necessary but focus on different aspect s of what can, broadly speaking, be called the
analysis of the efficiency of the public sector.
In this paper, we focus more on the sec ond strand of the literature but make some
references to the first one because of the co mplementarities between the two. In fact, the
Performance Related Pay (PRP) system suppose s in order to be efficiently set up, that
performance can be, even in principle, meas ured (Marsden and Belfield, 2006; Metawie and
Gilman, 2005). Accordingly, if there is a relation between incentives and performance in the
public sector, it is necessary in order to identi fy it to define and measure performance. Now,
                                                             
1 For a recent survey see Festré and Garrouste (2008).
2 The Al Gore’s report (1995) and more recently Atkinson (2005) Conseil d’Analyse Economique (2000) and
Bureau, Mougeot (2007) are examples of this evolution. Number of OECD reports also deals with this topic.
“An OECD report on performance-related pay of government employees shows that pay increases tied to work
performance are an appealing id ea, but difficult to implement.” (OECD, 2005a, p. 75).
3 This rapidly growing literature concerns, as we will see below economics as well as management and
administrative sciences. It is mainly developed in Healthcare and teaching.

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 measuring performance within the public sector is more complicated than it is in the private
sector for the following reasons4:
1) There is not always a perfectly identified output in the public sector as it is the case in
the private sector5. The quality of the output is an important element to take into
account.
2) The same output can be due to different ag encies (or services or departments); it can
be produced by different sets of inputs.
3) The same agency can produces different outpu ts; it can participate to the production of
different sets of outputs.
4) The outputs can be complementary or substitute.
5) The agencies may produce positive as well as negative externalities.
6) The output is not sold on the market or if it is the case not at its market price.
7) Statisticians have to get the information th ey need knowing the above difficulties. For
example if different ministries together produce one output, one needs to obtain the
relevant information from all of them.
We will examine more deeply the five first problems6 and give some elements
concerning the two last ones.
                                                             
4 According to Dixon (2002): “Public sector agencies have some special features, most notably a multiplicity of
dimensions-of tasks, of the stakeholders and their often-conflicting interests about the ends and the means, and
of the tiers of management and front-line workers. So metimes these special charact eristics explain why these
agencies are in the public sector in the first place. They also make inappr opriate the naive application of magic
bullet solutions like competition or performance-based incen tives.” (p. 697). See also Francois and Vlassopoulos
(2008). In Dixit (1997) it is assumed that multiple principa ls contract with on agent as in Martimort (1996) but
with adverse selection in this second case.
5 See for example Burgess and Ratto (200 3) for an analysis of the difficulty to measure public sector outcome
and performance.

6 Dixit (2002) defines the special features of the pub lic sector in a different but not contradictory way.
Accordingly, multiple principals, multiple tasks, l ack of competition and motivated agents are the main
characteristics of the public sector.

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 There is not a perfectly identified output in the public sector as it is the case in the
private one.
Public services are sometimes (if not often) a bundle of complex activities that is difficult
to identify. As for education, the output is diffi cult to define and then to evaluate. If for
example one measures the efficiency of public education by the number of students who pass
their final exams, even if it is supposed that no moral hazard may result from the teachers’ behavior, one takes only a part of the service delivered in to account. The acculturation of
students, their capabilities to work in groups, to take initiatives, etc. ar e then not taking into
account even if they are however important aspects of their ca pacities to enter successfully the
labor market, which can be considered to be the main role of the public education system
7.
The difficulty is consequently to identify al l the dimensions (the characteristics in a
Lancasterian parlance) of the output. As such this problem is not completely specific to the
public sector, but it becomes essential for th is later because it is linked with how one
conceives of the role of this sector. Classical explanations of the existence of the public
intervention in the economy are basically linked with the problem of externalities, market
failures, redistribution and the equity probl em. Those problems are the concern of the
economics of welfare and are strongly associated with some ethical and social dimensions.
The characteristics of public services are consequently mainly qualitative and cannot be
reduced to a quantitative problem (the search for profit) as it is usually the case in the private
sector. As an example, the existence of merit goods is relative to 1) the very definition of what
is considered as good or not for people to cons ume and 2) the fact that the public authorities
want to do what is good for people if they cannot do it or if they refuse to do it. Consequently,
individuals may be unable to ascribe a precise value (if not a price) to the output they
“consume”. All these different elements are linke d to the Weberian conc eption of the State as
the entity that has the “monopoly of the legitimate violence” and can therefore impose its will.
The same output can be produ ced by different sets of inputs
In a firm it is usually the case that indivi duals are interdependent and that the global
output is determined by the coordination betwee n them. The team theory perfectly analyses
                                                             
7 “Teaching is multidimensional and aimed at much wider outcomes than exam results or test scores.” (Burgess
and Ratto, 2003, p. 20) or “o ther academic subjects (such as science) and dimensions of learning that contribute
to the public good (such as civics) are typically a ssigned zero value.” (Kane and Staiger, 2002, p. 106.)

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 the consequences of this kind of problem in terms of incentives (Holmström, 1982),
communication and internal organization (Radne r, 1992). Moreover, the idea that different
firms, producing each a specific product are inte rdependent in the sense that they permit
together the production of a fi nal good does not affect the iden tification of their own output.
In the public sector, the problem is due to the fact that a give n output may be ob tained as the
result of different services th at are individually realizing thei r own missions. In the case of
cancer disease, for example, the reduction of th e number of cases can be the consequence of
improvements in the training of the healthcare employees, but may also result from public or
targeted information campaigns or from the prohi bition of certain activities or consumption of
toxicating substances. If the two first of these missions depend on the healthcare ministry, the
latter falls within the competence of the police.
The same agency can produces different sets of outputs
This case is the exact opposite of the previ ous one. The achievement of a given mission
can produce an output that, in principle, depends on anot her mission. As an example the
mission devoted to the police is to enforce la w and maintain public order. By this way it
arrests or even sometimes punish es directly the delinquents, fo r example those people who are
smoking in public buildings. In doing its job th e police services not only maintain public
order but also make the number of cancers due to smoking decreasing. This second output is
however a mission of the health care ministry. Such an example can be generalized and
justifies distinguishing between output (the actual result of a service) and outcome (the
realization of an objective) as it is advised in the Atkinson’s report (2005).
The outputs can be complementary or substitute
This problem is not exactly the same as th e previous one. In this case, the relations
involved are not accidental but result from the f act that the output of one service or agency
necessarily complements another or substitutes to it. Let us consider that the efficiency of
healthcare services can be roughly evaluated by the average life expect ancy of the population.
We suppose, for the sake of simplification, that this target can be achieved by the healthcare
services only (i.e., we rule out possible contribution from other public services).
Consequently, the higher the output of the h ealthcare mission the higher the number of old
persons living in a given country. This good re sult is however regard ed as a bad one by
economic and social agencies beca use it increases the cost of redistributing income. In this

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 case, the two outputs are s ubstitutes. As for the case of smoking prohibi tion, the outputs of the
police and of the healthcare are complementary.
The agencies may have positive as well as negative externalities
This problem concerns the cases when the production of an agency positively or
negatively impacts on the production of another, i.e. when different missions devoted to those
two agencies more or less overlap. This overlapping can produce both positive and negative externalities and may be solved by a more preci se definition of the mi ssions of the different
agencies. For example, in France, until recently the “gendarmerie” (linked with the ministry
of Defense) and the police (linked with the mini stry of the Interior) we re ascribed close and
sometimes identical prerogatives. This ove rlapping has sometimes engendered negative
effects in terms of the achievement of their own missions
8. This idea is at the origin of Dixit
(1997) idea that the accomplishment of multiple principals’ tasks by an agent can produce
externalities (positive or negative) between the principals’ payoffs.
The fact that the output of public activities is not sold on the market or is not sold at its
real price is the distinctive feature of what is commonly referred as the ‘non market sector’.
Consequently, the basic solution was, until rece ntly, to evaluate the public sector production
on the basis of the following equation: input = output . The corollary was the impossibility to
measure the productivity of the public sector. It is one of the elements that explain that the
ONS (Office for National Statistics) asked for re searches in order to directly evaluate the
production of the public sector. The Atkinson report (2005) is one the byproduct of this
attempt to precisely measure the output of the public sector. The idea that performance is to be measured taking into account all the elements that explain the level of the output is a
consequence of the five problems presented above. The difference introduced between output
and outcome is also due to the existence of the problems 1 to 5. Accordingly the second (B)
Atkinson’s report principl e states that “the output of the government sect or should in principle
be measured in a way that is adjusted fo r quality, taking account of the attributable
                                                             
8 Even in the same agency some negative externalities may occur. An example, again in France is the famous
rivalry between Lucien Aimé-Blanc and the superintendent Broussard in the attempt to arrest Jacques Mesrine.
Although the individual characteristics of these two persons might be an important explanation, the fact that their
respective roles were not precisely defined permitted their opportunisms to manifest.

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 incremental contribution of the service to the outcome ”. (Atkinson, 2005, p. 42, italics from
us)9.
All the problems listed above need to be solved before being able to analyze the relationships
between motivation, incentives and performan ce in the public sector. We will now propose
some element of analysis of these relationships.
Motivation, incentives and performance in the public sector
It could be said that the very existence of the specificity of the relationships between
motivation incentives and performance in the pub lic sector is only due to the difficulties to
measure performance. It could be indeed cons idered that if both pr oblems of definition and
measurement of performance are solved, nothing prevents from applying the same kinds of
solutions that are proposed in order to solv e the problems of incentives inside private
organizations10. Even the limits of those solutions can be extended to the public sector11.
In order to defend this point of view two problems need however to be solved. The first one
concerns the relationships be tween the public sector and ci vil servants’ motivation. The
second is a consequence of the performance re lated pay (PRP) system on the civil servants’
motivation. Let’s look at them successively.
The first problem concerns the kind of motiv ation that the public servants share. As
we will see below the studies converge towards the idea that those motivations are specific.
This specificity can however be intrinsic or resu lt from the very fact that individuals work as
civil servants. In the first ca se, individuals enter the public services because they are for
example more altruists, less money-interested or lazier than the others; in the second case, due
to the very characteristics of the public servic es they become either more others-regarding or
more opportunist. The first case is linked to wh at economists use to call a selection problem;
the second relates to moral hazard. If the princi pal wants an efficient agent in terms of the
                                                             
9 The nine Atkinson’s principles are in the appendix.
10 “The break up of large bureaucracies into specialist ag encies responsible for the delivery of specific services,
each with its own set of perf ormance targets has reduced the problems posed by conflicting levels of political
and management leadership” (Marsden , French and Kubo, 2001, p. 2).
11 “Teachers, health service profession als, job placement advisers and many tax officials have considerable
control over how they work, and in many cases, it is very hard for management to monitor the degree of effort and care they put into their jobs. In this regard, pub lic sector employees differ little from their private sector
counterparts. They also resemble priv ate sector employees in that assessmen t of their performance relies heavily
on subjective appraisal by line managers.” (ibid.)

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 costs of the achievement of a mission, he may i ndeed hire an egoist (or as in Prendergast
(2007), an agent hostile to the client as in the tax evasion problem). If however his main
objective is to satisfy the clients, he would prefer to select a mo re altruistic agent. As for the
moral hazard problem, its existen ce is linked with the difficulty or impossibility of measuring
the performance of the agent or of the team sh e is involved in. This difficulty of measuring
performance may induce a double moral hazard phenomenon inasmuch as the principal can
also manipulate that performance. (Marsden, French and Kubo, 2000, 2001).
To sum up, intrinsic motivation implies a se lection problem and is conditioned by the
compatibilities between the agent’s charac teristics and the principal’s interests.
The ‘evolution’ of the motivations of the ag ent can be ‘natural’, i.e., produced by his
‘mission’ or result from an opportunistic behavior, hence involving a (sometimes double)
moral hazard problem.
The second problem concerns the relations hips between PRP and the civil servants’
motivation. According to the li terature, both in economics a nd in public administrative
science, the effects of the im plementation of the PRP in th e public sector are far from
unambiguous. In fact it str ongly depends on 1) the assumpti on made concerning individuals’
(the employer-principal and the employee-agen t) characteristics a nd rationality, 2) the
existence of asymmetry of information, 3) the fact that this asymmetry is ex ante (adverse
selection) or ex post (moral hazard). Broadly speaki ng economists use to assume that
individuals are perfectly rational, even if some recent models introduce the idea that they can
be altruists, reciprocators or others-regarding, whereas in ad ministrative scie nce there is a
more complex typology based on the idea that individuals can be intr insically motivated by
working in the public sector (Public Service Motivation).
In order to disentangle those different el ements, we present successively the public
administration science approaches of the re lationships between mo tivation, incentives and
performance the economic ones. What is striking at first glance is the paradoxical fact that,
although evidence of increased effort and productivity in the public sector is put to the fore by
many economic studies (Burgess and Croxso n, 2001; Atkinson et al., 2004) as well as
psychological ones (Dowling and Richardson , 1997; Marsden and French, 1998) when
different PRP systems were applied, their im pact on employees’ motivation often proved to

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 be negative (Thompson, 1992; Marsden and French, 1998; Dowling and Richardson, 1997;
and Marsden, French and Kubo, 2000, 2001).
Motivation, incentives and performance in public administration science
The public administration science conception of the relationships between motivation
incentives and performance in the public sector is usually based on the idea that individuals
who work in the public sector have some specific characteristics.
According to Wise (2004) the characterizati on of bureaucratic post ures supposes the
following assumptions to be made:
1. Some individuals are predisposed to a particular set of motives.
2. Variations in the strength of different motives for work are related to work-role
choices and sector of employment, as well as personal characteristics.
3. Contextual factors affect the salience of different motives for work and the postures
bureaucrats take.
4. Individuals are complex, with mixed and competing motives, and they may display
multiple and competing motives for work-related behavior.
5. The posture that a bureaucrat takes within a given organization can be categorized into
different modal behaviors. However, these modal categories do not fully account for the behavior of individuals.
6. No single modal behavior accounts for the pos ture that all bureaucrats take.” (p. 671)
Accordingly Wise identifies four bureaucratic postures and groups them in the following
(figure 1):

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Figure 1: Wise (2004, p. 675)
In this figure, three substantive forms are introduced. The delegate who defends the values,
preferences and choices of peopl e with whom he shares social origins or group affiliations.
The “ trustee is someone who uses his or her judgm ent to act in the best interests of
individuals and groups” and a politico is someone who acts to maximize a political position or
personal status.” (p. 672).
Those kinds of approaches are then usually based on the idea that the bureaucrat has some
specific characteristics, a particul ar motivation to work for the public sector. As an example,
the Public Sector Motivation (PSM) is “an i ndividual’s predisposition to respond to motives
grounded primarily or uniquely in public instit utions or organizations” (Perry and Wise, 1990,
p. 368). This is why “in contrast to private managers, public ma nagers regarded public service
and work that is helpful to others as importa nt, whereas higher pay, status, and prestige were
less important.” (Moynihan and Pandey, 2007, p. 41). This literature assumes that “rational,
normative, and affective processes motivate hu mans; that people are motivated by their own
self-concept; that preferences or values should be endogenous to any theory of motivation;
and that preferences are learned in social processes.” (ibid, p. 42).
The Expectancy Valence Theory, the Cognitive Ev aluation Theory, Goal Setting theory, Self-
Efficacy Theory, or the Self-Determination Theory12 are generally mobilized to justify the
                                                             
12 See Festré and Garrouste (2008) for a presentation of thos e theories as well as the role they play in the attempt
to explain the crowding out effect.

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 idea that individuals have some intrinsic motivat ions, basic capacities, or socially determined
preferences that make them reacting differently to extrinsic motivations or rewards. As an
example, Wright (2007) presents the Figure 2 below that is base d on the idea that the kinds of
missions as well as the characte ristics of the job that civ il servants realize are strong
determinants of their work motivations

Figure 2: Wright (2007, p. 56)
We see here that extrinsic rewards are only one element that impact on the work motivation.
In a similar way, Perry, Mesh and Paarlberg (2 006) make a review of the literature on the
performance paradigm in the public sector usi ng its four basic elements: employee incentives,
job design, employee participatio n and goal setting. Their review is based on the framework
given in Figure 3:

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Figure 3: (Perry, Mesh and Paarlberg, 2006, p. 506)
We may notice here that pay satisfaction is only one of the 14 moderating variables.
In every kind of those works, what it is tested is the effect that extrinsic rewards, the
organization of the service, job design, the kind of missions realized, etc., i.e., contextual
factors that may affect the mo tivation of an employee, have on his work motivation, which is
supposed to be specific (for example PSM). Wh at is generally admitted is the following:
1) Mission matters. “Again, this suggests th at the basic framework provided by goal
theory can not only incorporate but also support the fundamental assumption of public
service motivation: that the intrinsic rewards provided by the nature or function of the organization may be more important to public sector employees than — or
compensate for the limited availability of — performance-related extrinsic rewards.” (Wright, 2007, p. 60). This result is interesting because it can explain the fact that the
civil servants that seem to be the less pos itively influenced by PRP are physicians and
healthcare employees.
2) Organization matters. As an example, empl oyees who work in a friendly organization
where they are empowered have a higher leve l of PSM than the others. Accordingly,

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 “reducing red tape and undertaking reform that clarifies goals and empowers
employees can have a positive effect on employee PSM. Other research suggests that helping employees feel as if they are mean ingfully contributing to organizational goals
reduces employee frustration and strength ens commitment.” (Moynihan and Pandey,
2007, p. 48).
3) Job design matters. The way job is designed strongly influences job satisfaction and
consequently work motivation. Such an influe nce is usually consider ed as mediated by
skill utilization. The independent variab les are job control (autonomy) and job
demand: “Increases in perceived job cont rol lead to the perception of greater
opportunities for skill utilization and developm ent and higher levels of intrinsic job
satisfaction.” (Morris on, Cordery, Girardi, and Payne, 2005). In the same way, Wright
(2007) positively tests i) that ev en if job-goal difficulty ha s a negative indirect effect
on work motivation through its influence on self-efficacy, it has a direct positive effect
on work motivation; ii) that job-goal spec ificity has a positive direct and indirect
(through self-efficacy) effect on wo rk motivation (cf. Figure 2).
4) Private and public employees differ. Buelens and Van den Broeck (2007) show that i)
compared to private sector employees, public sector ones are less influenced by
monetary rewards; ii) if public sector employees do not seem more sensitive to
intrinsic factors such as self -development or responsibility, they seem more motivated
by a supportive working environment; iii) “public sector employees report fewer
working hours and less willingness to exert considerable effort on behalf of the
organization”
13; iv), hierarchical level impact at least equally on motivational
differences than sector empl oyment (education, healthcare or police). Finally, if sector
employment is not a decisive factor as co mpared to gender, age or education, public
sector employees experience less work-family conflicts than private sector employees.
Burgess and Ratto (2003) show that if intr insic motivation is important in the public
sector, what is typical in this sector is the multiple principal problem, the fact that
measurement of performance and efforts is mo re difficult than in the private sector and
the importance of teams in the production of the output14.
                                                             
13 As we will see, this result apparently conflicts with Gregg and al. (2008) that show that civil servants are
donators of labor.
14 We find slightly the same characteristics in Dixit (2002).

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 5) Hierarchical position matters. It seems “that motivational patterns differ significantly
for higher – and lower – level public sector employees. The former are more private –
like, with high commitment, high satisfacti on, and smaller gaps between what they
want and what they get.” (Buelens and Van den Boeck, 2007, p. 70)15.
6) Commitment matters. This result may seem to contradict the fourth one. However,
civil servants seem to be highly concer ned by their commitment. Marsden (2001)
shows that civil servants are highly committed to their job.

Economics of motivation and in centives in the public sector

Until the 80s economics attempts to compare private and public sectors in terms of
incentives and performance. Th e results are not unambiguous. According to some studies,
PRP increases performance, but th is result depends on the sector. In healthcare, this is less the
case than in education. Basically, the theore tical approach is often (except for example
Francois and Vlassopoulas, 2008) a refinement of the incentive theory and, more particularly,
the agency theory.

The limits of the application of the ‘sta ndard’ agency theory in the public sector.
Agency theory that is based on the idea that two parties (one or more principals, on
one hand and one or more agents, on the other hand) have a basic common interest (they both
need to obtain a payoff) but also contradictory interests (the principal wants the agent to make
the highest effort while giving her the smallest possible wage and bonus whereas the agent
wants the highest possible revenue associated with the minimum effort). When information is
symmetrical with no uncertainty, it is possible to define the optimal contract between the two
perfectly rational parties. With uncertainty, inco mplete contract theory applies (Grossman and
Hart, 1986, Hart and Moore 1990). With informa tion asymmetry, classical normative agency
theory applies (Holmstöm, 1982; Laffont and Ti role, 1993). The three classical conceptual
categories that account for the relationships between the princi pal and the agent are i) the
moral hazard problem, i.e., when “the agent’s action affects the principal payoff, although the
                                                             
15 This result may challenge their idea that, because low level employees in the public sector are more likely to
consider their job as less interesting and challenging than do managers, they seem to be more potentially reacting
to pay for performance. This is however in line with the Self-Determination Theo ry that considers that a-
motivated people for performing a task need to be extr insically incentivized, and at the opposite intrinsically
motivation can be crowded out by extrinsic incentives.

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 action is not directly observable by the principa l (Dixit, 2002, p. 697); ii) the adverse selection
problem, when “the agent has some information at the time the contract with the principal is
being considered” (ibid., p. 698)16; and iii) the costly verification problem, when “the agent
can observe some outcome better than the prin cipal can, and the principal has to devise a
reward scheme and a costly outcome verifi cation scheme” (ibid.). Depending on the forms
taken by the asymmetry of in formation, the principal can propose at best a second-best
contractual solution. The possibil ity to apply those important results in the public sector
depends on the satisfaction of so me of the assumptions on which they are based. First, some
empirical and theoretical studies show that individuals are not uniquely motivated by
monetary incentives. Intrinsic motivations are considered as essential by some authors17.
Reciprocity18 or altruism19 may also alter the relationships between incentives and effort.
Although those results are not specific to the pub lic sector, they app ear to play a more
important role in this sector, judging from the literature data available. In particular, this
literature has stressed the fact that civil servan ts are more motivated by the tasks themselves
or by non monetary incentives than by monetary ones. Ethical purposes can also be at the
origin of the choice for an individual to em brace a public career. Prof essionalism is also an
explanation of the fact that i ndividuals work hard or even ha rder without obtaining the same
monetary compensation as in the private se ctor. Second, as said above, outcome, i.e.,
performance is harder to measure in the public sector than in th e private one. It is then much
more difficult to design an optimal contract as in the case of the moral hazard situation, because of the impossibility of conditioni ng the agent’s payoff on her performance
20.
Those two problems, the specificity of mo tivation and the difficulties to measure
performance have been discussed by economist s. Let us recall the main empirical and
theoretical results they have obtained.

                                                             
16 In Milgrom and Roberts (1992) mo ral hazard in defined as a post c ontractual opportunism and adverse
selection as a pre contractual form of opportunism.
17 See for example Deci (1975). For a su rvey on the crowding out effect in economics and psychology, see Festré
and Garrouste (2008)
18 See Fehr and Fishbacher (2005)
19 See Rabin (1998)  
20 See the model propose for example by Baker (2002).

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 Empirical results

1) Civil servants seem to be sensitive to monetary incentives. The efficacy of PRP
depends however on the sector of activity. Franck and Rosenthal (2006) show that
there is a weak effect of the financia l incentives on the quality of healthcare.
Sutton and McLean (2006) show that in Scotland, in clin ical practices, the size and
the team composition are the most signifi cant factors of perf ormance. However,
some cases of misreporting performance are effective in this sector. The explanation that is given is interesting because it combines classical opportunism
as for the misreporting behavi or, and altruism as for th e idea that physicians are
more motivated by the health of their pati ents than by monetary rewards. Another
explanation of Franck and Rosenthal (2006) is that “the presence of multiple
contracts placed too many competing demands on physician’s work.” (Prentice,
Burgess and Propper, 2007, p. 25). Finall y, “we find evidence that financial
incentives can yield productivity improveme nts for some public sector workers.
The evidence is strongest for civil serv ants and teachers but relatively weak for
healthcare workers.” (ibid. 37).
2) Civil servants are highly committed. When the PRP has been applied in the UK for
education, Marsden and al. (2000) report a de gradation of working climate, i.e., a
“lack of faith among employees in the system’s fairness [that] seemed to transform an essential tool of good management – communicating work targets to employees
– into a numbers game.” (Marsden and al., 2000, p. 12). The difficulty to measure
performance and the ensuing noise distur bing the relationship between effort and
assessed outcome encourage strategic beha vior by employees, such as negotiating
work targets or manipulating performance da ta (ibid.). The reas on why, given this
degradation, performance increased when the PRP has been implemented seems to
be the high commitment of the teacher s both to organizati on and work values:
“Our commitment variables, reflecting affective commitment to one’s workplace
and immediate work colleagues, and comm itment to the organisation’s goals
helped to sustain work relations with colleagues and with management. The
coefficients on both dimensions were str ong, and highly significant.” (ibid.). It is
interesting to note this strange relationshi p that seems not to be in contradiction
with the idea of a positive relation betw een job satisfaction and performance. In

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 fact, Marsden and al. (2000) explain that, in the s hort-term, teachers’ high
commitment to their job and organizatio n maintain good performance results but
that, in the long-term, this commitment is likely to decrease w ith degradation of
working climate. They add that “one w ould expect employees’ work behaviour to
become gradually more instrumental, and mo re akin to that of the principal-agent
model”. (ibid. p. 13). Another, however not contradictory explanation is that
employees are conditional reciprocators. If they consider indeed that they are paid
in an unfair manner, they reduce their le vel of effort which is unobservable by the
principal or they manipulate it if the pr incipal cannot verify this manipulation.

The theoretical models
There is an important literature which seek s to apply incentive theory (mainly agency
theory) to analyze working rela tionships in the public sector. Although “from the perspective
of traditional agency theory, providing incentive s for a public agency or a privately regulated
firm to deliver a service presen ts the government with generall y similar challenges” (Francois
and Vlassopoulos, 2008, p. 24), the theoretical literature usually assumes21 that the agents and
the principal are motivated by other aspects than monetary rewards and self-interest22.
Dewatripont, Jewitt and Tirole (1999) assume for example that bureaucrats are career concerned and that this motivation is efficient if the mission they have to achieve is narrowly
and precisely defined. Dixit ( 1997) or Martimort (1995) introdu ces the idea that an agent
faces multiple principals, although Martimort (1995) considers the case with the agent’s
private information. Accordingly, principals have to deal with the possib ility for the agent to
make effort for the achievement of the most re warded task among availa ble principal’s tasks.
Depending of the number of principals and the existence of externalities between the tasks,
the principal’s systems of incentives are efficien t or not. Three possibilities are described by
Dixit (1997). First, the principals need to be able to appraise and reward the outcome that
concerns them, second the principa ls can collude if they have th e same interests and third, the
agencies may design few precise missions.
                                                             
21 Baker (1992) gives a justification of the fact that, when the principal’s objective is not contractible (as it is
considered to be the case in the public sector), she has to propose a low-power ed incentives contract to the agent.
Holmstöm and Milgrom (1991) obtain similar results in the case of multi-tasking (as it is also the case in the
public sector).
22 This literature differs from the classical idea that the Public Choice approach defends. See Buchanan and
Tullock, 1962.

18 
 Prendergast (2007) provides a model where the agents can be either altruist , i.e. they want to
satisfy the clients of the public sector, or host ile towards them. Depending on the objectives of
the principal, she may hire altr uist, hostile or both types of ag ent. He obtains the following
results: “For a range of bureaucracies, thos e who are biased against clients yield more
efficient outcomes.” (Prendergast, p. 1) But “al though bureaucrats with a particular bias may
be desired, self-selection need not produce this. Instea d, if the distribution of preferences is
sufficiently dispersed, bureaucracies likely become composed of those who are most preferred
by the principal, and those who are least preferre d. Finally, incentive c ontracting (the use of
“extrinsic motivation”) can reduce effort exerte d, by having an adverse effect on who chooses
to become a bureaucrat.” (ibid.). Delfgaauw and Dur (2008) show “that, in additio n to workers with a public service motivation
(dedicated workers), a public ag ency may prefer to hire the economy’s laziest workers and
provide them with weaker incentives than the market sector does. Even though this reduces
aggregate welfare, a majority of society may be better off, as dedicated workers can be hired
at a lower wage, and hence public goods are produ ced at lower cost. When effort is to a large
extent unverifiable in the public sector, a public agency may hi re too many lazy workers as
they crowd out dedicated workers.” (p. 186). Acemoglu and al. (2007) show that government
can provide efficiently a public service (such as education in that case) when information is
asymmetric (the type of the teacher, i.e. its ab ility, knowing that the test s score is not a perfect
signal because it can be manipulated by the teac her) and difficult to obtain, the low-powered
incentives being a efficient solution as compare to the markets and the firms. Francois and Vlassopoulos (2008) challenge the idea that the non contractability problem of
the output justifies the choice of government provision as in st andard agency based
approaches. They consider that pro-social motiv ation is a better candidate. They then develop
a model based on the idea that agents have pro- social motivation and ca n be either pure or
impure altruists. In the first case, agents are concerned by the outcome to which they
contribute (they are output-oriented ) whereas in the second, agents are willing to participate to
the production that benefits to th e others (action-oriented). They show that if impure altruism
does not favor a particular kind of organization (private or pub lic) pure altruism is better in
line with government provision. Gregg and al. (2 008) confirm the argument of pro-sociability
in the public sector. They show, first, that pub lic services employees are labor donators, and
second, that they select between private sector and public se ctor on the basis of this
characteristic.

19 
 Prendergast’s (2007) argument against self-sel ection is however chal lenged by Vytastekova
and al. (2006), who present experi mental evidence of self-selection23. In their production
game, two individuals can produce inside a priv ate or inside a public firm (they have the
choice, depending on how they have selected themse lves as trustees or reciprocators, to work
for either a private or a public firm). They have to accomplish two tasks, one that improves
their own payoff and a second one (which may be assimilated to help of cooperation) that
improves the other’s payoff. The in terpretation of their results is that if the interdependency
between the employees is high a nd difficult to observe and if thei r incentives to cooperate is
high when incentives are low-powered, then high -powered ones may decrease their outcome.
(Vytastekova and al., 2006, p. 31). This result is in line with those of the empirical studies
quoted above concerning th e healthcare activities.
Let us now attempt to draw out some of the implications of the literature we have
surveyed.

Some propositions

The theoretical and empirical results review ed in this paper permit to define some
general propositions concerning the relati onships between motivation, incentives and
performance. The main point is that a more pr ecise measure of performa nce is needed if one
wants to avoid the problems associated with informational asymmetries (moral hazard,
adverse selection and costly verification pr oblems) and their deleterious effect on the
efficiency of the PRP system.
1) What is generally admitted is that the PR P system improves the performance of public
sector employees. The problem is however that this effect is dependent on the sector
of activity and on the performance-based porti on of the salary. Wh en bonuses are low
the effects are also low. In Brazil, for example Kahn, Silva and Ziliak (2001) study the
effect of bonuses given to th e civil servants as a functio n of their performance based
on the number of inspections and the amount of fines collected from tax evaders (plus
subjective performance for individuals). They observe a 75% increase in the rate of
growth of tax inspection. The bonus however amounted to 70% of the additional collected fines! At the opposite, even if there is a great dispersion across OECD
                                                             
23 They use a production game just after a trust game that permits to identify trust and reciprocal behaviors.

20 
 countries, bonuses based on performance repres ent no more than 5% of the base salary
(OECD, 2005b, p. 53). In the same way, Pren tice and al. (2007) explain the relatively
bad performance of the PRP system for hea lthcare employees, as recorded by Franck
and Rosenthal (2006), by the combined effect of low bonus rates and multiple tasks. In the education sector, according to Kane and St aiger (2002) “the labor value of the test
score increase would have been worth roughly 20 to 50 times the value of the
incentives provided in 2001 by California – the state with the most aggressive
incentive strategy. (p. 111). Here is a po ssible paraphrase of Gneezy and Rustichini
(2000): “Pay enough or don’t pay at all” or Kohn (2003) who, in a more provocative
and negative way writes “pay people well, pay them fairly, and then do everything possible to help them forget about mone y”. This is important to note because,
depending on the weight of individuals’ in trinsic motivation and various other factors
such as self-reputational motives or ethical or moral values, the resulting effect of
extrinsic incentives may well be either positive (crowding in) or negative (crowding out). Another important aspect concerns how to incentivize: individuals, teams or
organizations (the teachers, the teams of teachers or the school). If the system
incentivizes the teachers, the level of coope ration between them is likely to decrease
while if the target is the school, free-riding is likely to increase.
2) If the effect of the PRP depends str ongly on the motivation of public sector
employees’, but if those motivations are pro- sociality oriented and stable, then it is
advisable to design a PRP system in such a way as to avoid crowding out to occur. If civil servants prove to be strongly intr insically motivated, pay for performance may
well undermine their motivation and decrease their performance. If however civil
servants have evolving pr eferences (Pre ntice and al., 2003) and become more and
more akin to the Homo Economicus , then the modified agency theory models may
perfectly apply. In a way, this amounts to solve the difficulties identified by Dixit
(1997, 2002), i.e., to define precisely the mi ssions and tasks of the public sector, to
ascribe one task to one principal and to m easure specific outputs by agents. Only if we
are able to solve those problems can we hope to be able to compare on the same
grounds the relative performance of the privat e and public sectors. As for Prendergast
(2007), such a possibility strongly depends on the objectives of the principal.

21 
 3) We may finally deplore th e lack of attention that both economics and public
administrative science devote to the analysis of the role of clients (Prendergast, 2001,
2003, 2007 and Francois, 2006 are exceptions). Th is aspect is however important in
the context of the implementation of a PR P system. Empirical evidence shows that
information delivered to the clients can have a counterproductive effect. As in the case
of the police, Prendergast ( 2001) offers evidence that th e increase in performance
measurement and public oversight on thei r job undermined officer’s willingness to
arrest people, which in turn caused a signifi cant increase in crime rates. Furthermore,
Prendergast (2003), in a mode l where clients are allowed to complain, shows that
bureaucracies are always inefficient. Most of the results found in the case of
healthcare also apply here. Due to intensif ied supervision over healthcare services,
physicians are incentivized to multiply the te sts in order to avoid potential prosecution
by their clients (Milgrom and Roberts, 1992) (t his last problem is however not specific
to the public sector).
Conclusion

In this paper, we have shown that the relationships between mo tivation, incentives and
performance have given rise until the 80s to an abundant literature, both theoretical and
empirical in many fields of the social scienc es. The survey of the literature has revealed
common themes and preliminary results. A firs t result is that PRP systems do increase
performance but generally reduce public sector employees’ motivation. The efficiency of the
PRP systems proves to depend strongly on the type of mission or activity (for instance, it
appears to be less efficient in healthcare than in education). It is al so conditioned by the
hierarchical position of the empl oyees: higher-level employees seem to be more intrinsically
motivation than lower-levels employees. When faced with the PRP system, civil servants
continue to behave in an altruistic manner but some of them switch to opportunistic behavior
(information manipulat ion, misreporting).

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Appendix

The nine Atkinson’s principles:
“Principle A: the measurement of government non-market output should, as far as possible,
follow a procedure parallel to that adopt ed in national accounts for market output.

Principle B: the output of the gove rnment sector should in principl e be measured in a way that
is adjusted for quality, taking account of the attributable incrementa l contribution of the
service to the outcome.
Principle C: account should be taken of the complementarity between public and private
output, allowing for the increased re al value of public services in an economy with rising real
GDP.
Principle D: formal criteria should be set in place for the extension of direct output
measurement to new functions of government . Specifically, the conditions for introducing a
new directly measured output indi cator should be that (i ) it covers adequately the full range of
services for that functional ar ea, (ii) it makes appropriate al lowance for quality change, (iii)
the effects of its introduction have been tested se rvice by service, (iv) th e context in which it
will be published has been fully assessed, in particular the implied productivity estimate, and
(v) there should be provision for regular statistical review.

26 
 
Principle E: measures should cover the whol e of the United Kingdom; where systems for
public service delivery and/or data collecti on differ across the different countries of the
United Kingdom, it is necessary to reflect th is variation in the choice of indicators.
Principle F: the measurement of inputs shoul d be as comprehensive as possible and in
particular should include capital services; labour inputs should be compiled using both direct
and indirect methods, co mpared and reconciled.
Principle G: criteria should be established for the quality of pay and price deflators to be
applied to the input spending seri es; they should be sufficiently disaggregated to take account
of changes in the mix of inputs and should reflect full and actual costs.

Principle H: independent corroborative evidence should be sought on government
productivity, as part of a process of ‘triangul ation’, recognising the limitations in reducing
productivity to a single number.
Principle I: explicit reference should be made to the marg ins of error surrounding national
accounts estimates.
”