Professionalism and Contracts in Organizations

Employees in public agencies rarely have pay for performance: instead their incentives are often guided by a sense of professionalism. This paper concerns how organizations should monitor professionals. The primary outcome of the paper is that weak incentives lead public agencies to exhibit bias in their oversight, by rewarding the interests of their employees to the detriment of other constituencies’ concerns. In some instances, this bias is complete by entirely ignoring other interests. University of Chicago Booth School of Business. Email: [email protected]. A previous version of this paper circulated under the title “Contracts and Conflict in Organizations”. Thanks to Mike Waldman, Wouter Dessein, Bob Gibbons, and seminar participants at the University of Chicago, Columbia University, Northwestern University, Harvard/MIT, UCLA, UNC, ESRI, and the NBER for helpful suggestions. Public agencies typically have two characteristics. First, they have competing interests, where their employees are called upon to satisfy multiple objectives. Second, their employees rarely have pay for performance. Motivating such employees is a central concern of the public administration literature, but has received relatively little attention by economists. A commonly cited motivation of public officials is their sense of professionalism. This paper concerns how firms should monitor professionals. The primary outcome of the paper is that optimal oversight typically involves public agencies showing bias in how they trade off objectives, by excessively internalizing the interests of their employees to the detriment of other constituencies’ concerns. In some instances, this bias is complete by entirely ignoring other interests. In this sense, agencies appear to be captured by their employees’ interests. There is a small academic literature on professionalism. Two issues are clear from this. First, professionals often exert considerable effort, often based on the importance of the perceptions held by “peers”. For example, Wilson, 1989, describes professionals as those who “receive some significant portion of their incentives from organized groups of fellow practitioners” (p.60). Second, while professionals exert effort, their interests are often not aligned with those of their employers. The widely accepted definition of professionalism derives from Hall, 1968. Two of his defining characteristics of professionals are: (i) selfregulation: “the belief that the person best qualified to judge the work of a professional is a fellow professional”, and (ii) autonomy: “the feeling that the professional ought to be able to make his own decisions without external pressure from clients and those who are not members of his profession” (p.92). This suggests that a problem with professionals is that they only answer to each other rather than to all competing interests. So, for example, social workers value benefit provision to clients over cost control, police officers are easier to motivate to catch “bad guys” than to do community outreach, engineers working on auto safety seek technical solutions to problems rather than driver behavior modification, academics value research over administration, and so on. Accordingly, professionalism is characterized here as the combination of (i) agents having incentives for reasons other than pay for performance, and (ii) incentives biased in Despite this, many continue to exert considerable effort. Much of this literature is in the field of public administration or political science (such as Goodsell, 1998, and Brehm and Gates, 1997). As an extreme case, note that the US Post Office hardly known for its extensive use of performance pay has ontime delivery rates of mail in the region of 98%, and in less than 3% of cases do government officials fail to give enough benefits to welfare recipients (Goodsell, 1998). Dixit, 2002, offers a review of the existing economic literature and offers many examples of the competing interests of public sector employees.