Volume 37, Number 4 (Fall) 2002
Courty, Pascal, and Gerald Marschke. 2002. "Performance Incentives with Award Constraints." Journal of Human Resources 37(4):812-845.
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 de- signers may have additional objectives in addition to effort maximization.
Gerald Marschke is an assistant professor of economics and of public administration and policy at the State University of New York, Albany. Pascal Courty is an assistant professor of economics at the London Business School. This paper is a revision of a paper entitled "Designing Optimal Award Functions: Theory and Application to a Government Organization" that was prepared for the National Academy of Sciences conference on "Devising Incentives to Promote Human Capital." The authors would like to thank James Heckman for stimulating their interest in the study of incentives in government organizations. They thank Margaret Meyer as well as seminar participants at UCL and University Pompeu Fabra and participants at conferences organized by the CEPR, CMPO, ESSET2000, North American Econometric Society, Western Economic Association, and the NAS. All errors are exclusively the responsibility of the authors. The data used in this article can be obtained beginning February 2003 through January 2006 from Gerald Marschke, BA-110, University at Albany, State University of New York. Albany, NY 12222, marschke@albany.edu .
© 2003 by the Board of Regents of the University of Wisconsin System
US ISSN 0022-166X