Most government expenditure is on goods that yield primarily private bene-<BR>fits, such as education, pensions, and healthcare. We argue that markets are<BR>most advantageous in areas where high-powered incentives are desirable, but in<BR>areas where high-powered incentives stimulate unproductive signaling effort, firms,<BR>or even government, may have a comparative advantage. Firms may be able to<BR>weaken incentives and improve efficiency by obscuring information about individual<BR>workers’ contribution to output, and thus reducing their willingness to signal<BR>through a moral-hazard-in-teams reasoning. However, firms themselves may be<BR>unable to commit to not providing greater compensation to employees who distort<BR>their efforts to improve observed performance. Government organizations, on the<BR>other hand, often have flatter wage schedules, thereby naturally weakening the<BR>power of incentives. We suggest that there are also endogenous reasons for why<BR>governments, even when run by self-interested politicians, may be able to commit<BR>to lower-powered incentives than firms, because government operation makes<BR>yardstick comparisons, which increase the power of incentives, more difficult.<BR>Keywords: career concerns, incentives, moral hazard in teams, signaling,<BR>multi-tasking, schools, team production, teachers.<BR>JEL Classification: D23, L22, H10, H52.
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