Incentives and productivity measurements

This paper discusses how to evaluate productivity measures from the point of view of incentive provision in a decentralized organization. Two perspectives are introduced. One is concerned with the set of production plans that Decision Making Units (DMUs) can be motivated to implement and the other with the costs of providing such motivations. The paper also examines how a particular class of productivity measures, namely those based on Data Envelopment Analysis (DEA), may contribute to the incentives of DMUs. The need to reward ‘over-efficient’ DMUs is emphasized, and it is shown that a simple refinement of the original DEA measure may support the implementation of a large class of production plans.