Overshooting and Adjustment: Organizational Responses to Incentives in the Public Sector

ABSTRACT Incentives have become central to public sector management. We propose that public organizations' responses to incentives can exceed policymakers' intentions due to complex governance structures and high operational uncertainty. Through an empirical study, we examine short‐ and long‐term impacts of a policy that gave local governments high‐powered, sanction‐based incentives to restrain costs. The incentives reduced government spending, but also triggered substantial overshooting—where local governments, immediately after the reform, cut spending more than intended due to uncertainty about their ability to meet budget targets. Over time, spending converged with incentivized budget targets, indicating a process of adjustment and organizational learning. Our findings highlight that incentives can provoke stronger responses than intended by policymakers—but also show that longer‐term learning can moderate these effects. While particularly relevant to the public sector, the phenomenon of overshooting may extend to other settings where uncertainty is prevalent.