Performance Management Goldilocks Style: A Transaction Cost Analysis of Incentive Intensity in Performance Regimes

Abstract

This article advances a framework for identifying the likely implications of incentive intensity and associated transaction costs when employing performance management systems in the public sector. Performance management encompasses a broad range of systems including Managing for Results, PerformanceStat systems, performance-based contracting, and performance-based budgeting that seek to increase the capacity of government to achieve desired outcomes. These regimes share some common features, but, in practice, involve differing levels of incentive intensity, meaning the potency and certainty of the rewards and/or penalties attached to goal attainment. The article argues that increased intensity of incentives may improve organizational performance but very likely at the expense of higher governance costs. The framework is employed in a critical literature review of empirical research on performance management in the public sector. The review highlights the importance of considering the balance between weak incentives, which render few benefits, as opposed to very high-intensity incentives, which increase administrative costs while reducing benefits by encouraging gaming and other perverse responses.

Keywords:

• incentives
• performance management
• performance regimes
• transaction costs

Notes

Notes

1 Asset specificity does exist in the public sector. Williamson (1999), for example, argues that work in the diplomatic corps entails deep training in foreign relations protocols and expertise in obscure regions that are not easily transferable outside the State Department. Further, in contracting situations, analysts have identified benefits from continued relationships with specific providers (Heinrich & Choi, 2007). Nonetheless, few argue that it plays as significant a role as it does in private-sector governance choices.

2 More technically, the optimal level of incentive intensity occurs at the point where the marginal costs equal the marginal benefits of the last increment in incentives. In most cases, a downward shift in the cost curve will decrease the marginal costs compared to the initial cost curve leading to an increase in the optimal level of incentives. There is the possibility, however, that complex changes in organizational situations twist the cost curve in ways that lead to increases, decreases, or no change in the optimal level of incentives.

Additional information

Notes on contributors

Juliet Ann Musso

Juliet Ann Musso is Associate Professor of Public Policy at the University of Southern California, Sacramento, CA.

Christopher Weare

Christopher Weare is at the Goldman School of Public Policy, University of California, Berkeley, CA.