A theoretical framework for incentives in the public sector

This note considers the provision of incentives in public organizations that face the following three constraints. First, no lateral entry is possible. Second, the outside opportunities of bureaucrats are independent of their performance. Third, the organization cannot design incentive schemes with stochastic wage bills. In our incentive scheme., the organization contains three jobs. Every period, the organization recruits two agents for the "field" jobs. At the end of the period, one agent is put in retirement and the other is promoted to the "executive" job. An agent will be promoted if he has obtained the highest performance on the managerial aspects of the "field" job, and has passed an endogenous standard of performance on the technical aspects of this "field" job. This system (1) provides incentives for optimal efforts in the "field" job AND (2) improves on a purely random allocation system of the "executive". There are problems of time consistency, though.