Power of Incentives with Motivated Agents in Public Organizations

Abstract

AbstractPublic service motivation is often considered as an argument for low‐powered incentive schemes in the public sector. In this paper, we characterize the optimal contract between a public regulator and an altruistic agent according to the degree α of public service motivation, when the type of the public service consumer is privately observed. We show that the requested effort is nondecreasing with α and can be higher than the first‐best level. Moreover, we show that the agent is put on a high‐powered contract when some customers are served but that this contract is associated with different types of consumers according to α. In contrast, the agent is never put on a cost‐plus contract. Finally, we show that the first‐best allocation can be achieved under budget balance for a degree of altruism higher than a threshold that we characterize.