This paper’s interest is in understanding how bureaucracies should respond to their clients. I claim that because many services are not priced, the responses of bureaucracies to their clients will often be the opposite of the reactions of “normal” firms. Specifically, bureaucracies ignore the most credible complaints from clients, provide the poorest service to clients who value the service most, and require the most red tape for clients who already know their needs.

Employees in public agencies rarely have pay for performance: instead their incentives are often guided by a sense of professionalism. This paper concerns how organizations should monitor professionals. The primary outcome of the paper is that weak incentives lead public agencies to exhibit bias in their oversight, by rewarding the interests of their employees to the detriment of other constituencies’ concerns. In some instances, this bias is complete by entirely ignoring other interests.

Empirical work testing for a trade‐off between risk and incentives has had, at best, mixed success. This article provides two simple reasons, associated with subjectivity of performance appraisals, why we might not expect to see any negative relationship. Both reasons relate to empirically observed problems associated with monitoring: (i) supervisors sometimes bias their evaluations based on their personal feelings toward their subordinates, and (ii) supervisors will sometimes offer evaluations that reduce their costs. These aspects of monitoring are ignored in the standard model and can reverse the usual negative trade‐off between risk and incentives.

This paper provides an overview of the existing theoretical and empirical work on the provision of incentives. It reviews the costs and benefits of many types of pay-for-performance, such as piece rates, promotions, and long-term incentives. The main conclusions are (i) while there is considerable evidence that individuals respond to pay-for-performance, there is less evidence that contracts are designed as predicted by the theory, (ii) there has been little progress made in distinguishing amongst plausible theories, and (iii) we still know little about how incentives are provided to workers whose output is difficult to measure.

This article considers the implications of allowing a manager discretion over task assignment. If employees earn rents from carrying out tasks, and the manager cannot "sell" the jobs to her subordinates, she has an incentive to take on more tasks than is optimal and delegate too few to a subordinate. I show that although firms can alleviate this incentive by offering output-contingent contracts, even with the optimal contract, (i) the manager carries out too many tasks, (ii) she exerts too much effort on her own tasks, and (iii) her subordinate exerts too little effort on his tasks.

Workers act in the interests of their employ? ers for a host of reasons. Sometimes money is the motivation, but often it is because they care about what they do. Despite the importance of such intrinsic motivation, the economic litera? ture has offered little in terms of understanding relevant trade-offs when alignment of inherent preferences (rather than monetary interests) is what motivates people.1 Instead, the literature has focused largely on the efficiency gains that arise from agents sharing the preferences of their employers.2 This paper offers such a theory of intrinsic motivation, where firms partially solve agency problems by hiring agents with particu? lar preferences. Unlike the previous literature, I show that firms, in general, hire agents who do not share their interests?instead, agents are disproportionately motivated to carry out a sub? set of what the firm cares about. Specifically, I show that the institution hires the agent with similar preferences to himself only in the limit? ing case where the agent's preferences are irrel? evant?namely, when output can be perfectly contracted on. Instead, the optimal response of the institution is to hire biased agents, with the degree of bias increasing as mea? sures get worse. The reason for this is rather simple?that jobs within firms are specialized. So, for example, some people make things, others design them, yet other sell them, and so on. Similarly, aca? demics do research, deans raise money, admin? istrators do the books, social workers provide services to clients while their superiors are charged with cost control, etc. The principal novelty of this paper is to show how hiring practices?and specifically the intrinsic moti? vation of those hired?changes as the ability to contract worsens in a world where tasks are specialized. In doing so, it paints a picture of firms responding to noncontractibility by hiring agents with very extreme interests, at the cost of their ignoring other aspects of their jobs. So, for example, if the output of a social worker cannot be measured, a natural response will be to hire agents who are highly motivated to get benefits to clients, at the cost of their ignoring things like cost control. Simple though this observation is, it illustrates a cost to using intrinsic motiva? tion?namely, the endogenous hiring of those who increasingly care only about one aspect of their job. In this way, the simple model outlined here lays the foundation for a view of poor contracting firms as fiefdoms, where those with extreme competing interests reside, a point I elaborate on elsewhere (Prendergast 2008). For a theory of intrinsic motivation to be use? ful, firms must have some control over it. The central assumption here is that firms have some ability to hire employees based on these intrin? sic preferences. I build a model of an institution that carries out two activities?say, service pro? vision and cost control. It employs two agents to do so. The tasks are somewhat specialized, in that one agent primarily (but not exclusively) does service provision and the other primarily does cost control. The institution has an objec? tive that trades off these two components and has a performance measure that can reward agents. The firm also chooses whom to hire. Potential * Discussant: Robert Gibbons, Massachusetts Institute of Technology.

Many individuals are motivated to exert effort because they care about their jobs, rather than because there are monetary consequences to their actions. The intrinsic motivation of bureaucrats is the focus of this paper, and three primary results are shown. First, bureaucrats should be biased. Second, sometimes this bias takes the form of advocating for their clients more than would their principal, while in other cases, they are more hostile to their interests. For a range of bureaucracies, those who are biased against clients lead to more efficient outcomes. Third, self-selection need not produce the desired bias. Instead, selection to bureaucracies is likely to be bifurcated, in the sense that it becomes composed of those who are most preferred by the principal, and those who are least preferred.

This paper illustrates an incentive for workers to conform to the opinion of their supervisors when firms use subjective performance evaluation. This desire to conform arises endogenously from the firm's need to induce the worker to exert effort. The author shows that firms may optimally eschew the use of incentive contracts to retain workers' incentives for honesty. The author illustrates that the incentive to conform implies inefficiencies, even when workers are risk-neutral, and is likely to lead to more centralized decision-making than in the absence of the desire to conform.