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

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.