Drawing on contract theory and the problems of moral hazard, a significant chunk of the academic literature has examined the impact of PRP on increasing effort and reducing shirking. In situations where effort is unobservable, fixed pay contracts provide little ability for employers to influence employee effort. This is especially likely to be the case in traditional civil service jobs characterized by uniform pay for jobs in similar grades, pay increases based largely on seniority, and negligible probability of termination. Contracts that tie observable outputs, which are correlated with unobservable effort, to desired pay incentives can mitigate such problems. Some of the literature has attempted to move beyond effort and to introduce the concept of ―engagement‖ as a measure of an employee‘s emotional and intellectual commitment to their employing organization and its success, encompassing both commitment (―I like working here‖) and organizational citizenship (―I am prepared to go the extra mile‖), with the question then being what impact can PRP have on staff engagement. Contract theory also suggests that PRP can help address the problem of adverse selection by encouraging high ability individuals who will do better under a performance pay scheme to join the agency and similarly discouraging low ability individuals (the ―sorting‖ effect).

Critics counter that PRP does not work when tasks are multi-dimensional as it results in ―gaming‖ behavior whereby effort is only allocated towards what is observed and measured which may not improve overall outcomes. A huge literature has examined the challenges in effectively designing these schemes, particularly in public sector contexts where tasks are complex and outcomes cannot be easily measured. The psychological and behavioral economics literature in addition has argued that individuals are also motivated by intrinsic concerns about the inherent social value of the job — particularly in the public sector — and that PRP which explicitly focuses on extrinsic benefits might crowd-out intrinsic motivation thereby reducing worker productivity.

In reviewing the empirical evidence, 153 studies in total, the paper is explicit in focusing largely on job types that are relevant to the public sector and characterized by task complexity and unobservability of effort thereby excluding studies that examine PRP for simple manufacturing jobs or other repeatable tasks. These jobs, borrowing James Q. Wilson‘s typology, are classified as ―craft‖ and ―coping‖ jobs. This narrows the list to 110 studies. Reviewing these, the paper draws the following conclusions. First, a majority (93 of the 153) of all studies find some positive effect of PRP, and a majority (65 of 110) of studies of craft and coping jobs show positive findings. Limiting the analysis to craft and coping also shows while early case studies found largely inconclusive evidence on the impact of PRP on staff morale, effort, and productivity, work over the last 10 to 15 years that has been based on more systematic observational studies and experimental evaluations in the laboratory and in the field have generally found that explicit performance standards linked to some form of bonus pay can improve, at times dramatically, desired service outcomes. 46 of the 68 high quality studies of craft and coping jobs showed a positive effect of PRP.

Second, however, these more rigorous studies are usually for jobs where the outputs or outcomes are more readily observable, such as revenue collection, teaching and health care. There is simply not enough robust evidence, positive or negative, of the effect of PRP in organizational contexts that that are similar to that of the core civil service, characterized by task complexity and the difficulty of measuring outcomes to reach a generalized conclusion for reform. To be specific, of the 68 high quality studies, only 2 were for contexts similar to core civil service jobs. Third, while some of these studies have shown that PRP can work even in the most dysfunctional bureaucracies, there is limited evidence in developing country contexts (only 10 high quality studies), with considerable discretionary as opposed to rule-based behavior and with significant politicization that can negatively affect the overall credibility and legitimacy of the incentive scheme. Fourth, several observational studies identify problems with unintended consequences and gaming of the incentive scheme, although it is unclear whether the gaming 2