for managers to identify good performance and reward it accordingly. In India, for example, malaria workers were offered a monetary incentive linked to the number of slides they processed. Since monitoring was weak, workers created artificial smears using dog’s blood and used these to claim the bonus (Das Gupta and Khaleghian 2002). Mookherjee (2001) writes: Even deeper problems arise with respect to defining measures of good performance, conditional on which bonuses can be paid. How does one measure the output of a teacher, or a policeman? [Designing] such performance metrics is tricky even in the context of developed countries, owing to their multidimensional nature, where some dimensions more difficult than others to measure. Measuring and rewarding the more measurable dimensions may be dysfunctional, since they may cause the official to divert effort towards those dimensions that are measured, at the expense of those that are not. For instance, if teachers are evaluated are evaluated on the basis of their students’ grades, they might then be motivated to redirect their teaching to emphasize examination technique at the expense of real learning; in extreme cases even to leak exam questions to their students.

This underscores the complexity and danger of using personalized incentives as a way to improve agency performance. (The impact of such incentives on cooperative behavior is also relevant, as discussed earlier.) It also highlights the fact that choices about monitoring are the product of two countervailing forces: the desire for simplicity, which makes measurement easier and cheaper but runs the risk of creating perverse incentives, and the desire for comprehensiveness, which creates more accurate incentives but can be costly to implement.

Here too the institutional context matters. As Mookherjee (2001) writes: The difficulty of investigating and establishing the incidence of corruption is compounded by civil service norms and legal difficulties in securing dismissal. The worst consequence for a tarnished official is frequently transfer to a less lucrative assignment, or a temporary suspension for a few months. Transfer policies often tend to be used instead by political superiors to reward or punish compliance with their own personal agendas, rather than merit based performance.

Specifically, in settings where political corruption is widespread, monitoring rules are set by politicians who have a vested interest in keeping them weak. Shirley and Xu use data from 12 countries to show how this leads performance-based incentive schemes to fail: ...the governments negotiating our sample contracts chose to pledge actions that they were not motivated or able to implement. Second, with the exception of India, Korea and Mexico, the supervisory agencies were not given the capacity to negotiate, monitor and evaluate well. Their information advantage was reinforced by other government actions, such as giving them low pay and status, frequently moving them within the government, and failing to force the SOEs [state-owned enterprises] to comply with their information requirements. This allowed managers to manipulate the targets, which proved to be a serious failing of all the contracts in our sample.

What do these points imply for the EPHFs? First, they show that monitoring matters.

Second, they suggest that monitoring should not focus on outcomes alone, given their distal and distant nature, but should instead use carefully chosen proximate measures that can be used to monitor performance but are still relevant to the production of outcomes. Third, they highlight the potential role of information systems—both HIS and MIS—in providing data inputs for service 18