On Managerial Incentives, Performance Indicators and Efficiency Audits in Public Enterprises

Abstract

This article discusses the issues of the selection of performance indicators and the design of efficiency audits in public enterprises following a standard principal-agent model. First, using a well known proposition on the value of information we argue that there must exist a limit to the number of performance indicators employed and that some broadly advocated measures such as productivity indices may be redundant if a well defined (outcome-based) bonus incentive scheme is already in use. Second, following recent theoretical research on managerial accounting we interpret efficiency audits as conditional information mechanisms or costly investigations that are triggered only in specific circumstances, which depend on the extreme realisations of the outcome used to evaluate managerial performance.