DP5906 Public Sector Motivation and Development Failures

Author(s): Rocco Macchiavello

Publication Date: October 2006

Keyword(s): public sector motivation , developing countries , corruption , multiple equilibria

JEL(s): D73 , H10 , O11 , P49

Programme Areas: Development Economics

Link to this Page: www.cepr.org/pubs/dps/DP5906.asp.asp

This paper provides a theoretical analysis of the relationship between public sector motivation and development. In the model the public sector produces a public good and workers are heterogeneous in terms of public sector motivation (PSM). Wages in the private sector are increasing in the quality of the public good. In this context, public sector wage premia (PSWP) have two opposite effects: low PSWP help screen workers with PSM into the public sector, while high PSWP help motivate workers to be honest. Raising PSWP may not improve the quality of governance and multiple equilibria might arise. The model highlights that the relative importance of workers selection and provision of "on the job" incentives in the public sector varies in systematic ways with wages in the private sector. I provide anecdotal and original empirical evidence consistent with the theoretical predictions and discuss some policy implications for public sector reforms in developing countries.