dynamic context, requiring ongoing adjustments by the principal (Courty and Marschke 2003). Luck during early periods of the evaluation period can induce increased slack for the rest of the time, a form of incentive gaming that has been found to be empirically relevant, as an influential study of Navy recruiters has shown (Asch 1990). To counteract excessive gaming of incentive schemes, it has been suggested, in the context of student test scores and teacher merit pay, to use evaluation systems independently from output measurements, i.e. in the case of teacher evaluations, to measure teacher contributions in tests different in form and content from instruments designed to track overall student and school progress or national exams (Neal 2011). Additionally, relative performance schemes in which employees are ranked against each other, potentially in a formal tournament setting are much harder to manipulate (Barlevy and Neal 2011; Neal 2011).

However, (Marsden 2009) notes that the gaming is not necessarily restricted to ingenious behaviors on the part of staff. Managers required to implement performance-pay arrangements might conclude that, in the bargaining with their staff concerning efforts and results, it is tempting and doubtless easier to: ―collude with their subordinates: to go through the motions and fill in the forms for goal setting and appraisal, but not to worry about the reality‖ (Marsden 2009, p.5) As outlined above, incentive schemes do not necessarily have to reward individual performance, but can focus on rewarding teams. Rewarding team performance can have certain advantages, ranging from reduced evaluation costs, to avoiding harmful competition between employees. However, basing rewards on team outputs can also lead to problems of free-riding where some team members willfully reduce their efforts in the expectation of relying on the work of others. The strength of free-riding problems depends on the size of the team and internal monitoring and punishment norms (Dixit 1999).

Picking the correct size of bonus brings its own challenges. Small bonuses will have little incentive effects and fall short of expectations, while large bonuses can lead to employees to treat incentive schemes as pure lotteries, especially if outcomes are strongly stochastic (e.g. student test scores (Neal 2011)), and to encourage cheating.

A reverse problem can arise if employees have to deal with multiple principals, a common feature of public service hierarchies. If different principals value different outputs, have different information available and have little ability or incentive to coordinate, separately designed incentive schemes are likely to fail (Dixit 1999).

# **Behavioral economics —intrinsic versus extrinsic motivation**

Building on the argument that worker motivation is also driven by intrinsic concerns behavioral economists have advanced a line of argument that casts additional doubt on the feasibility of performance pay arrangements, specifically in public service settings. Introducing explicit monetary incentives for employees with strong intrinsic motivation can have the effect of crowding-out these intrinsic affects, i.e. workers change their perception about the organizational goals and values, leading to an overall reduction of effort. Even small changes in the pecuniary reward structure can induce a change in attitudes, switching from seeing the task as a partially voluntary contribution to a low paid contract service without any ownership stake. Crowding-out can be especially salient if performance pay is introduced using antagonistic framing and can stifle creativity and collaboration (Frey and Osterloh 1999). While the theory of intrinsic motivation has been proposed by psychologists, formal treatments of the trade-off between extrinsic and intrinsic motivation have been developed (Kreps 1997; Benabou and Tirole 2003, 2006) and integrated in the wider context of public goods provisions (Besley and Ghatak 2004).

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