Identity, incentives and their dynamics in the production of publicly provided goods, Working papers DEAS, n. 2011-27, Università degli studi di Milano

An important issue in the literature on the role of government provision of goods and services concerns the understanding of inefficiencies related to the opportunistic behavior of public employees. This paper studies incentives in such contexts and analyzes the consequences of introducing a behavioral component into a model of agency within public organizations. In particular, we argue that employees may be motivated to provide effort in ways that enable them to shape their identity/self image. The term identity describes gains and losses in utility from behavior that conforms or departs from the ideal prescribed for particular social categories, such as being a "good" public employee. We develop a principal-agent model that incorporates identity, in addition to monetary rewards, and we show that when agents are guided by such intrinsic motivations, it may be optimal for the principal to choose a relatively inefficient monitoring technology and reduce monetary incentives. The mechanism leading to this result is related to the general equilibrium effect going through the public administration budget constraint and the composition of workers within the firm. We then analyze a dynamic version of the model and show that a higher political instability may induce the government to adopt inefficient organization schemes that reduce the value of identity and negatively affect future provision of public services.