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INCENTIVES AND THEIR DYNAMICS
IN PUBLIC SECTOR PERFORMANCE
MANAGEMENT SYSTEMS
Carolyn J. Heinrich
LaFollette School of Public Affairs
University of Wisconsin-Madison
Gerald Marschke
Department of Public Administration Policy
and Department of Economics
State University of New York at Albany, NBER and IZA1
May 31, 2009
Preliminary; please do not quote or cite without permission
1 This paper was completed while Marschke was visiting the Kennedy School of Government and the Labor and
Worklife Program at Harvard Law School. Marschke gratefully acknowledges both institutions’ hospitality.
Abstract
We use the principal-agent model as a focal theoretical frame for synthesizing what we know
both theoretically and empirically about the design and dynamics of the implementation of
performance management systems in the public sector. In this context, we review the growing
body of evidence about how performance measurement and incentive systems function in
practice and how individuals and organizations respond and adapt to them over time, drawing
primarily on examples from performance measurement systems in public education and social
welfare programs. We also describe a dynamic framework for performance measurement
systems that takes into account strategic behavior of individuals over time, learning about
production functions and individual responses, accountability pressures, and the use of
information about the relationship of measured performance to value-added. Implications are
discussed and recommendations derived for improv
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