Sweetening the Carrot

It is widely observed that many physicians working in public health facilities do not put in the required effort and/or time in their jobs. At the same time, many public physicians remain highly motivated, working long hours for little financial reward in providing quality health services. This mix of providertypes poses fundamental challenges in the design of compensation mechanisms and monitoring regime in public facilities, where the ultimate objective of any reward-control paradigm is to improve the inoptimal performance of some physicians without compromising the effort of those already motivated. This paper presents a model to explain shirking behavior among public physicians and explores combinations of monitoring and incentive mechanisms that meet the twin objectives of inspiring the shirkers without losing the motivated. Drawing upon the basic Shapiro-Stiglitz shirking model and the theory of social custom, the paper develops and presents a design of incentive structures that consists of punitive monitoring systems accompanied by non-pecuniary rewards. The analysis shows that intensive monitoring persuades the shirking physicians to improve their performance but may have a negative effect on the morale of those already motivated. Our findings indicate that non-pecuniary rewards and recognition for the latter can potentially restore the incentives and counter the deleterious effect of increased supervision. The policy implications are discussed by presenting interesting case studies in the health care context of developing countries. JEL Classification: I11; I18; J33