Bureaucracy

A common observation for public sector organisations is that explicit incentives (e.g. bonus pay and promotion contests) are rarely used (Holmstrom and Tirole 1989, Dewatripont et al. 1999a, Dewatripont et al. 1999b). Firing costs are often high for public servants, and formal incentives are rarely a feature of bureaucratic remuneration.

The new public management literature of the 1980s and 90s led to a number of policy experiments on incentives and proved to be controversial (see Hood 1995 for a review). Important sources of controversy surrounded issues of multi-tasking, perverse incentives and high transaction costs due to the increased need of specifying and monitoring contracts (Williamson 1979). In recent years, however, there has been a renewed interest in whether there is greater scope for such rewards. These studies of incentives face a series of challenges that are particularly salient in the public sector context.

Difficulties of measuring performance

The implementation of incentive contracts requires a mapping between a bureaucrat’s output and reward. In the public sector, the overarching challenge in the implementation of incentive contracts is the measurement of performance. Bureaucrats complete complex tasks that are particularly difficult to quantify. To measure output, work in private sector settings would focus on specific production processes, such as the installation of windshields (Lazear 2000), the picking of fruits (Bandiera et al. 2009), or line-level productivity in factories (Atkin et al. 2017). While such well-defined tasks may exist for front-line providers such as nurses or teachers (Ashraf et al. 2014, Deserranno et al. 2022, Muralidharan and Sundararaman 2011, Duflo et al. 2012), measuring output for more senior bureaucrats who implement policy and design rules is more difficult and sometimes performance is proxied by compliance with rules. More generally, a major challenge in low state capacity settings is limited ability to verify reported compliance (Andrews et al. 2017).

Furthermore, organisational goals in the public sector are most often multi-dimensional and non-verifiable. The first of these raises the issue of how different dimensions of performance are aggregated and/or traded-off against each other. The second implies that it is difficult, even ex post, to establish whether a particular goal was met. Another issue, which we refer to in greater detail below, is the attribution of individual contributions in team production, where the measure of performance cannot be disentangled across agents (Holmstrom 1982). Finally, with most transactions occurring inside the organisation, output is seldom evaluated in markets, thus making it hard to value (Downs 1965).

Measurement issues are further compounded by challenges of mission design. Bureaucracies by their nature are not geared towards narrow goals based on financial criteria. Thinking of bureaucracies as mission-driven organisations is most closely associated with Wilson (1989) and is also emphasised in Tirole (1994). The notion of a mission is a catch-all for a range of outcomes that a bureaucracy might pursue.[1]1. There has been an increased effort in trying to establish how bureaucracies are performing. As a result, there has been great interest in cross-country comparisons. One famous example is the World Bank's Doing Business project which provides evaluation and ranking across a range of state roles in supporting markets. For example, there is an attempt to measure how costly it is to set up a new business.

The microeconomic literature has taken several approaches to performance measurement. The most common approach restricts the analysis to bureaucrats and tasks that can be more easily measured, like agricultural extension workers (Dal Bó et al. 2021), revenue collectors (Khan et al. 2016, Khan et al. 2019, Aman-Rana 2022), health care providers (Ashraf and Bandiera 2018, Deserranno et al. 2022, Khan 2020), teachers (Akhtari et al. 2022, Leaver et al. 2021, Brown and Andrabi 2021), procurement officers (Bandiera et al. 2021, Best et al. 2019) or judges (Dahis et al. 2023, Mehmood 2021). The clear advantage of this approach is the direct mapping from an individual to a comparable outcome. The disadvantage is that this approach works – with exceptions – mostly for lower tier civil servants who are more specialised. An exception perhaps is the use of attendance data, which provides an extreme measure of non-performance that can be applied to all workers (Chaudhury et al. 2006, Dhaliwal and Hanna 2017, Callen et al. 2023). 

To make progress, a second approach has followed the CEO literature (Bertrand and Schoar 2003) by attempting to map higher-level individuals to an aggregate outcome. In the private sector setting, CEO traits may be related to company-specific outcomes such as profits or stock market returns. Examples in public organisations include provincial governors and GDP growth (Jia 2017), governors and colony-level revenue generation (Xu 2018), field office managers and office-level outcomes (Fenizia 2022), and district-level development outcomes (Gulzar and Pasquale 2017). While this approach allows the study of the impact of more senior officers on aggregate outcomes, the exact mechanism through which they affect outcomes is hard to pin down. Furthermore, this approach is also limited to organisations with many comparable high level units that serve the same functions, such as field offices or districts.

Finally, another strand of the literature uses subjective performance measures. Such ratings are frequently found in internal evaluations across both private and public organisations. Rasul and Rogger (2018), for example, code administrative project reports to obtain project completion ratings and relate them to management practices. Limodio (2021) uses internal project performance ratings of the World Bank to study the allocation of World Bank staff. Bertrand et al. (2020) field a large-scale survey in which they collected subjective assessments of senior Indian civil servants among dimensions such as effectiveness, probity or pro-poor orientation. The advantage of this approach is that it can be applied to any task and output (including qualitative), providing a more holistic measure. The disadvantage is that perceptions could be biased, thus calling for the need of objective measures to validate or complement.

Overall, the measurement of bureaucrat performance remains a challenge. Approaches in the literature are highly context-specific, depending on the type of public officials studied, and the complexity of the job they execute. 

Multi-tasking and implementation challenges

Even when output measures are available, the choice of how to map output to reward remains an open question. Assuming that output only has a single dimension is often unrealistic. Bureaucrats also frequently work across multiple tasks and can therefore choose which tasks to concentrate their effort on and hence which outputs are favoured (Holmstrom and Milgrom 1991).[2]2. Another dimension of a bureaucrat's action could also be whether to ask for a bribe. Then whether a bribe is paid becomes a dimension of (non)-performance.

The main implication of multi-tasking, which has been discussed extensively, arises when some tasks are more easily measured than others and are incentivised. This is particularly problematic when the efforts put in different dimensions are substitutes. A classic example is when teachers who are incentivised according to test results focus excessively on this rather than on all round performance. One way around this is to get better measures of performance on alternative dimensions and the other is to have a less steep incentive scheme. In many settings, it is easier to implement a non-linear compensation scheme, such as a bonus paid for the highest performer (e.g. a monthly competition), or a threshold rule (e.g. bonus paid for each student with straight As). While such compensation schemes are abundant, such nonlinearities have distortionary effects. In the education setting, for example, conditioning teacher remuneration on test score outcomes could lead teachers to spend more time developing test-taking skills rather than general instruction (Glewwe et al. 2010). If teachers are compensated based on the number of students passing an exam, teachers may also divert effort away from the inframarginal students towards the marginal students close to the passing threshold (Neal and Schanzenbach 2010, Ahn and Vigdor 2014). Similarly, when incentive contracts reflect tournaments, the incentive effect may be large for those who are marginal but absent for those who are inframarginal. In Khan et al. (2019), for example, high performing revenue officers are rewarded with the transfer to their preferred work locality. The incentive effects, however, depend on how many other officers compete over the same locality. Officers competing over popular localities may thus be disincentivised if they perceive their chances to “win” to be low. Similarly, officers who prefer less popular districts may have little incentive to exert effort if they stand to receive their allocation anyway.

Relatedly, there is a choice of “who to incentivise.”’ Public service provision requires coordination between multiple types of stakeholders and incentive design must reflect that. Deserranno et al. (2022) provide first empirical evidence that the allocation of incentives across the hierarchy of an organisation matters in the context of health-care provision in Sierra Leone. They find that sharing incentives equally between the lower and upper layer of the hierarchy raises output by 61% compared to unilateral allocations that are typical in public organisations.  Another challenge arises from the very nature of public services that often involves inputs from both providers and citizens. If providers believe that all their effort and resources will be substituted away by citizens, incentives may not work. This has been documented as an important factor behind the limited effectiveness of input augmentation policies in education (Pop-Eleches and Urquiola 2013, Mbiti et al. 2019).  Finally, there is a general concern that incentives are harder to implement for more senior civil servants. To prevent influence activities and political interference, classic bureaucracies have typically relied on easily measurable characteristics such as seniority (Prendergast 1999, de Janvry et al. 2020). A downside of such rigid rules however is that they may disincentivise performance (Bertrand et al. 2020). 

The second consideration for designing incentive contracts is whether to contract on output or input. Output is often not only imperfectly observed but also subject to shocks beyond the control of the bureaucrat. However, in some contexts inputs are easier to observe and more closely reflect deliberate choices made. In the teacher example, performance pay could be either based on output – e.g. test scores (Muralidharan and Sundararaman 2011) – or based on inputs – e.g. teacher attendance (Duflo et al. 2012). The key difference lies in how much autonomy is granted to the bureaucrat. By contracting on inputs, the designer implicitly commits to a specific mapping between input and output. To the extent that the production function is more complex, however, the bureaucrat – by virtue of expertise – may possess better information about the optimal mix of inputs. Dal Bó et al. (2021) provide evidence for this in the context of agricultural extension workers in Paraguay. When provided with a monitoring technology to supervise subordinate workers, they find that middle-managers prioritise those subordinates who would be more responsive to the treatment. In general, incentivising on inputs may make more sense when outcome is difficult to measure or monitor, e.g. patient health, and when production inputs are clearly identifiable, feasibly measured, and non-substitutable, e.g. teacher attendance. Incentivising on outputs may make more sense when production inputs are difficult to identify, measure, or monitor, e.g. tax collector’s effort, and when outcome must meet a threshold, e.g. test scores.

Despite challenges in the design and implementation of incentives that can make these fail or even backfire, recent research does suggest that incentives “work” if well designed. There is now a large body of work that documents the role of incentives for front-line public service providers such as health care workers (Ashraf et al. 2014), teachers (Muralidharan and Sundararaman 2011, Leaver et al. 2021) and tax collectors (Khan et al. 2016). These studies focus on tasks for which performance is easier to measure. Multi-tasking concerns are often directly anticipated and built into the research design, mostly by attempting to measure both incentivised and non-incentivised outcomes. Khan et al. (2016), for example, designed an incentive scheme to reward tax collectors based on revenue collection. To test for the role of multi-tasking, they include two additional treatment arms: a “revenue plus” that ties the bonus not only on revenue generation but also taxpayer satisfaction, and a “flexible bonus” that is based on a more holistic subjective evaluation.

Non-monetary incentives

Despite the renewed interest in incentives in public organisations, the use of explicit, monetary incentives remains the exception rather than the norm. Instead, bureaucracies have relied on alternative, indirect and non-monetary means to incentivise performance, such as leveraging heterogeneity in the desirability of (same-seniority) postings either along vertical traits (e.g. prestige) (Iyer and Mani 2012, Jia 2017) or horizontal traits (e.g. personal preference) (Khan et al. 2019). The implementation of such incentive schemes, however, still hinges critically on the accurate measurement of performance. It is perhaps for that very reason that indirect means of inducing performance, for example through rotations or high turnover, have often been excessively used for political purposes (Akhtari et al. 2022) and satirised as a “bureaucratic merry-go-around” (De Zwart 1994). For more senior positions an important determinant of effort and choices made are accountability systems that punish non-compliance with rules through criminal charges or career consequences, serving as a de facto negative non-monetary incentive. There is an incipient literature on how such systems can lead to waste in government (Bosio et al. 2022, Bandiera et al. 2021). Considering how pervasive these systems are in developing countries, more work is needed on that front. 

Finally, it is often suggested that those who work in bureaucracies are mission-motivated and thus care about the output even if their monetary compensation is not explicitly tied to it (Ashraf and Bandiera 2018, Besley and Ghatak 2018, Bénabou and Tirole 2006). Mission may thus be a potentially cost-effective way to incentivise performance when bureaucracies have limited budgets. Khan (2020) provides experimental evidence from healthcare workers in Pakistan that greater mission emphasis helps increase worker performance and improve health outcomes. Importantly, the greater focus on mission helps increase performance even on dimensions that were not explicitly incentivised, suggesting that mission-motivation may also help alleviate multitasking problems. In the contemporary US setting, Spenkuch et al. (forthcoming) show that ideological alignment of procurement officers with the serving President increases performance and self-reported morale.

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