Productivity Improvements in Public Organisations

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. Copyright 2005 Royal Economic Society.