Identity, Incentives, and Their Dynamics in the Production of Publicly Provided Goods

This paper aims to clarify the role of government provision of valuable goods and services when (i) workers may be intrinsically motivated to exert effort and (ii) there are constraints on how production occurs. We analyze the optimal organization of production in a model where agents' preferences have a behavioral component and where some decisions are made by a central authority and others are made at a lower, decentralized level. In this framework we show that it may be optimal for the central authority to choose a relatively inefficient monitoring technology and to reduce monetary incentives. The mechanism driving this result is related to a general-equilibrium effect as mediated by the public-administration budget constraint and the firm's own composition of workers.