TY  - JOUR
AU  - Acemoglu,Daron
AU  - Kremer,Michael
AU  - Mian,Atif
TI  - Incentives in Markets, Firms and Governments
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9802
PY  - 2003
Y2  - June 2003
UR  - http://www.nber.org/papers/w9802
L1  - http://www.nber.org/papers/w9802.pdf
N1  - Author contact info:
Daron Acemoglu
Department of Economics
MIT, E52-380B
50 Memorial Drive
Cambridge, MA  02142-1347
Tel: 617/253-1927
Fax: 617/253-1330
E-Mail: daron@mit.edu

Michael Kremer
Harvard University
Department of Economics
Littauer Center M20
Cambridge, MA 02138
Tel: 617/495-9145
Fax: 617/495-7730
E-Mail: mkremer@fas.harvard.edu

Atif R. Mian
University of California, Berkeley
Haas School of Business
545 Student Services
Berkeley, CA 94720
Tel: 510/643-1425
Fax: 510/643-1425
E-Mail: atif@haas.berkeley.edu
AB  - Most government expenditure is on goods that yield primarily private benefits, such as education, pensions, and healthcare. We argue that markets are most advantageous in areas where high-powered incentives are desirable, but in areas where high-powered incentives stimulate unproductive signalling effort, firms, or even government, may have a comparative advantage. Firms may be able to weaken incentives and improve efficiency by obscuring information about individual workers' contribution to output, and thus reducing their willingness to signal through a moral-hazard-in-teams reasoing. However, firms themselves may be unable to commit to not providing greater compensation to employees who distort their effots to improve observed performance. Government organizations, on the other hand, often have to flatter wage schedules, thereby naturally weakening the power of incentives. We suggest that there are also endogenous reasons for why governments, even when they are run by self-interested politicians, may be able to commit to lower powered incentives than firms, because government operation makes yardstick comparisons, which increase the power of incentives, more difficult.
ER  -