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Performance Incentives with Award Constraints

Gerald Marschke () and Pascal Courty ()

Discussion Papers from University at Albany, SUNY, Department of Economics

Abstract: This paper studies the provision of incentives in a large U.S. training organization which is divided in about 50 independent pools of training agencies. The number and the size of the agencies within each pool vary greatly. Each pool distributes performance incentive awards to the training agencies it supervises, subject to two constraints: the awards cannot be negative and the sum of the awards cannot exceed an award budget. We characterize the optimal award function and derive simple predictions about how award prizes should depend on the number of agencies, on their sizes, and on their performances. Our results indicate that the constraints on the award distribution bind and reduce the overall efficiency of the incentive system.

Keywords: Performance Incentive; Limited liability; Fixed Award Budget; Government Organization. (search for similar items in EconPapers)
JEL-codes: O32 O34 (search for similar items in EconPapers)
Date: 2000
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