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Productivity Improvements in Public Organisations*


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     We thank Volker Hahn, Martin Hellwig, Till Requate, Eva Terberger-Stoy and Jean Tirole, seminar participants in Basel, Heidelberg and at the annual meeting of the German Economic Society 2000 in Berlin, two referees and the editor for their helpful comments.


In this article we examine the scope a principal in a public organisation has for motivating agents for productivity improvements where standard stick and carrot incentives cannot be used. The principal's only incentive device is a reallocation of budgets and tasks across agents depending on the extent of productivity improvements revealed by each agent. We first show that as long as agents do not collude, the principal can use rotation and tournament schemes to eliminate all slack in the organisation. Second, to break collusion between agents, the principal must use discriminatory tournament schemes. In some cases, however, there is no incentive scheme that can overcome collusion.

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