Performance Budgeting: Incentives and Social Waste From Window Dressing

Performance budgeting schemes in the public sector have to operate with imperfect performance measures. We argue that these imperfections generate incentives for the potential recipients of performance-based funds to use up resources in socially wasteful window dressing. Using a theoretical model, we analyze the trade-off between the efficiency-enhancing effect of performance budgeting (PB) and the social waste it induces. We show that the social waste from window dressing may outweigh the gains from PB. This social waste provides an explanation for the mixed empirical evidence concerning the impact of PB on public sector performance. We provide first guidance on how to assess window dressing and its consequences in future empirical studies.