Performance-Based Incentives in Public Sector Services

Vanitha Virudachalam, University of Pennsylvania


This dissertation studies the role of performance-based incentives in public sector service operations. In particular, we consider incentives in the context of K-12 education and healthcare. These systems share three key characteristics: the quality of service provision depends both on the efforts of the service provider and customer, the provider is paid by a third-party, and measuring the quality of service provision is difficult. In three chapters, we study different facets of the incentive problem. In the first chapter, we consider the problem faced by school districts seeking to maximize student performance, as measured by annual state exams. Using a dynamic two-period principal-agent model, we study the interaction between two levers that the school district can use to improve performance: a midyear “interim assessment,” which will more accurately gauge whether students are on track to perform well, and performance-based incentives for teachers. We show that investing in an interim assessment is beneficial in only a limited number of scenarios; our results suggest that the growing dependence on third-party assessments may be misplaced. In the second chapter, we turn to healthcare. We study the problem faced by a profit- maximizing, resource-constrained hospital that controls patient inflows by designing a case- mix of its elective procedures and patient outflows via patient discharges. We consider a hospital that makes these decisions in the presence of bundled payments, which implicitly penalize high readmission rates. In our analysis, we focus on assessing the benefits associated with the hospital employing a coordinated decision-making process, in which both portfolio and discharge decisions are made in tandem. We compare a coordinated decision-making structure to two commonly utilized decision-making structures and characterize when the hospital can most benefit from coordination. Finally, in the third chapter, we return to K-12 education. We study the impact of coproduction on the student performance in the presence of merit-based rewards for both teachers and students, using a Cobb-Douglas formulation of the education production function and a Stackelberg model of teachers’ and students’ effort decisions. We characterize students’ and teachers’ optimal effort levels for a given reward allocation, and we illustrate the impact on student performance.

Subject Area

Operations research|Business administration|Educational evaluation|Public policy|Public administration|Health care management

Recommended Citation

Virudachalam, Vanitha, "Performance-Based Incentives in Public Sector Services" (2020). Dissertations available from ProQuest. AAI28002880.