Financial Incentives in Multi-layered Organizations: an Experiment in the Public Sector

Abstract: A classic problem faced by organizations is to decide how to distribute incentives among their different layers. By means of a field experiment with a large public-health organization in Sierra Leone and a structural model, we show that financial incentives maximize output when they are equally shared between a front-line worker and her supervisor. Compared to incentive schemes that target exclusively the worker or the supervisor, this intervention significantly raises the number of completed health visits by 61 percent. Also, the shared incentive uniquely improves overall health-service provision and disease incidence. We use these experimental results to structurally estimate a model of service provision and find that shared incentives are effective because (i) worker and supervisor effort are highly complementary, and (ii) contracting frictions discourage transfers between agents. These features have several implications for optimal incentive design. For example, the strong effort complementarity increases the relative effectiveness of schemes that incentivize joint output compared to schemes that directly reward agents for their effort.