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Performance Incentives with Award Constraints

  • Pascal Courty
  • Gerald Marschke

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.

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Article provided by University of Wisconsin Press in its journal Journal of Human Resources.

Volume (Year): 37 (2002)
Issue (Month): 4 ()
Pages: 812-845

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Handle: RePEc:uwp:jhriss:v:37:y:2002:i:4:p:812-845
Contact details of provider: Web page: http://jhr.uwpress.org/

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  1. Edward P. Lazear, 1996. "Performance Pay and Productivity," NBER Working Papers 5672, National Bureau of Economic Research, Inc.
  2. Edward P. Lazear & Sherwin Rosen, 1979. "Rank-Order Tournaments as Optimum Labor Contracts," NBER Working Papers 0401, National Bureau of Economic Research, Inc.
  3. 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 389-95, May.
  4. 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.
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