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Dynamics of Performance Measurement Systems


  • Gerald Marschke
  • Pascal Courty


We present a model of how organizations manage performance measures when gaming is revealed over time. The incentive designer does not know when it selects a performance measure whether it will communicate the right behavior. Only over time does the principal find out the agent's responses and then uses this additional information to update and finetune the incentive system. Using data from a government organization, we test the model's main prediction that the correlation between the performance measure and the true goal of the organization should change after the performance measure is included in the incentive system and we find some evidence consistent with this hypothesis.

Suggested Citation

  • Gerald Marschke & Pascal Courty, 2002. "Dynamics of Performance Measurement Systems," Discussion Papers 02-09, University at Albany, SUNY, Department of Economics.
  • Handle: RePEc:nya:albaec:02-09

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    References listed on IDEAS

    1. Paul Oyer, 1998. "Fiscal Year Ends and Nonlinear Incentive Contracts: The Effect on Business Seasonality," The Quarterly Journal of Economics, Oxford University Press, vol. 113(1), pages 149-185.
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    5. Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
    6. Murphy, Kevin J., 2000. "Performance standards in incentive contracts," Journal of Accounting and Economics, Elsevier, vol. 30(3), pages 245-278, December.
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    8. W. Norton Grubb & Lorraine M. McDonnell, 1996. "Combatting program fragmentation: Local systems of vocational education and job training," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 15(2), pages 252-270.
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    10. James J. Heckman & Jeffrey A. Smith & Christopher Taber, 1996. "What Do Bureaucrats Do? The Effects of Performance Standards and Bureaucratic Preferences on Acceptance into the JTPA Program," NBER Working Papers 5535, National Bureau of Economic Research, Inc.
    11. Howard S. Bloom & Larry L. Orr & Stephen H. Bell & George Cave & Fred Doolittle & Winston Lin & Johannes M. Bos, 1997. "The Benefits and Costs of JTPA Title II-A Programs: Key Findings from the National Job Training Partnership Act Study," Journal of Human Resources, University of Wisconsin Press, vol. 32(3), pages 549-576.
    12. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
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    14. Healy, Paul M., 1985. "The effect of bonus schemes on accounting decisions," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 85-107, April.
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    Cited by:

    1. Bruttel, Oliver, 2005. "Contracting-out and governance mechanisms in the public employment service," Discussion Papers, Research Unit: Labor Market Policy and Employment SP I 2005-109, Social Science Research Center Berlin (WZB).
    2. 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.
    3. Finn Christensen & James Manley & Louise Laurence, 2011. "The Allocation of Merit Pay in Academia: A Case Study," Economics Bulletin, AccessEcon, vol. 31(2), pages 1548-1562.
    4. Finn Christensen & James Manley & Louise Laurence, 2010. "The Allocation of Merit Pay in Academia," Working Papers 2010-13, Towson University, Department of Economics, revised Jul 2010.
    5. Courty, Pascal & Marschke, Gerald, 2004. "A General Test of Gaming," CEPR Discussion Papers 4514, C.E.P.R. Discussion Papers.
    6. Kuhn, Michael & Siciliani, Luigi, 2013. "Manipulation and auditing of public sector contracts," European Journal of Political Economy, Elsevier, vol. 32(C), pages 251-267.
    7. Hubley, Teresa, 2008. "Lessons from a project to create performance measures for public health," Evaluation and Program Planning, Elsevier, vol. 31(4), pages 410-415, November.
    8. Kato, Takao & Kauhanen, Antti & Salmi, Julia, 2013. "Empirical Evidence on the Dynamics of Incentive Plans," ETLA Working Papers 20, The Research Institute of the Finnish Economy.
    9. Pascal Courty & Gerald Marschke, 2003. "Making Government Accountable: Lessons from a Federal Job Training Program," The Centre for Market and Public Organisation 03/083, Department of Economics, University of Bristol, UK.
    10. Schmid, Günther, 2004. "Gewährleistungsstaat und Arbeitsmarkt: Neue Formen von Governance in der Arbeitsmarktpolitik," Discussion Papers, Research Unit: Labor Market Policy and Employment SP I 2004-107, Social Science Research Center Berlin (WZB).
    11. Peter Friedrich & Joanna Gwiazda & Chang Woon Nam, 2003. "Development of Local Public Finance in Europe," CESifo Working Paper Series 1107, CESifo Group Munich.
    12. Hasnain, Zahid & Manning, Nick & Pierskalla Henryk, 2012. "Performance-related pay in the public sector : a review of theory and evidence," Policy Research Working Paper Series 6043, The World Bank.
    13. Siebert, W. Stanley & Zubanov, Nick, 2008. "Management Economics in a Large Retail Organization," IZA Discussion Papers 3645, Institute for the Study of Labor (IZA).

    More about this item


    Performance Incentives; Performance Measurement; Gaming; Multitasking; Government Organization;

    JEL classification:

    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation


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