Self-Interest or Public Interest: The Role of Incentive Schemes in Public Sector Employees’ Decisions

Abstract

ABSTRACT Changes in public sector management systems have resulted in public sector organizations adopting business models similar to private corporations. Using two experiments that vary in the service quality provided to public sector constituents, this study examines how different incentive schemes impact public sector employees’ decision-making. We find that performance-based incentive schemes in the public sector increase employees’ self-interest and lead them to focus more on maximizing their personal wealth (which is aligned with organizational economic efficiency) at the expense of service quality to public sector constituents (i.e., public interest). However, we also find that employees’ decisions are more focused on service quality and less on wealth maximization when their decisions may negatively impact public sector constituents. Overall, we find that employees who receive fixed compensation are more likely to consider how their decisions impact public service quality and are less likely to focus on personal wealth maximization. JEL Classifications: H11; L33; M21; M41.