Abstract

Referring to results obtained by the economic theory of contracts and incentives, this paper aims to analyse and discuss specificity and application problems with the introduction of performance-related-pay in the civil service. In particular, a simplified agency model "à la" Holmstrom and Milgrom (1991) is presented and its results are then extended according to the multi-principal logic in order to consider the effects produced on public agents' incentives by the multidimensionality of objectives and the presence of multiple political and institutional principals which characterise the Public Administration. It is shown as these aspects, which in the public sector are strictly connected with the goal of social welfare, can strongly reduce the power of incentives for civil servants; various cases and examples are presented and discussed. Furthermore, reasons for which such problems are more severe in the public than in the private sector are analysed in detail and some policy implications are discussed.