Economics professors especially those who practice mainstream (or neoclassical) economics including me have a tendency to prescribe `hire and fire’ policy as a way to enhance the efficiency of organizations. We may think that the use of contract employees and financial incentives may enhance the efficiency in all types of organizations.

However, in our personal life, we look for per anent jobs. There is a hypocrisy in this regard. How do we explain this behavior?  In one sense, such a behavior is not at all rare. Entrepreneurs who argue for opening up markets would prefer (and sometimes argues for) some monopoly in their own economic activity. The business press which shouts for economic reforms and the opening up of economy in India, does not want Foreign Direct Investment in Media.

The behavior of economics professors is a little more complex. The prescription to use contract workers, `hire and fire’ policy, and also financial incentives to enhance efficiency is not based on a realistic understanding of the world around us. For example, as professors we know that it is very difficult to run a university department with contract/guest lecturers. Yes, it is possible to have such a situation but one cannot expect much quality in terms of teaching and research there. Those who are on contract would spend most of their time struggling to get a permanent job, and they may not have much time and a peaceful mind to equip themselves to be good teachers. Those who prescribe these short-cuts to improve efficiency also neglect certain insights from research in economics.

Extrinsic versus intrinsic motivation

We know that people are motivated by financial (material) and non-financial incentives. An award or other types of social recognition could be examples of non-financial incentive. However this is an extrinsic recognition that comes from outside the individual. There can be intrinsic motivation too. Here one performs well because it gives him/her satisfaction even if no one else recognizes it. Doing the right thing may motivate some people.

One common perception is that the impacts of extrinsic (including financial) incentive and intrinsic motivation are additive. Here the assumption is that a person, who is interested in working better or more effectively due to intrinsic motivation, can be encouraged to work well by providing financial incentives. However such external/financial incentives and the intrinsic motivation need not move in the same direction in all contexts. Or one may work against the other.

An interesting case, often quoted in economics literature, came from a systematic study in Israel. A crude description of the case is the following: A small section of parents, who keep their children in a play school, have been coming very late to take back their wards. This has created a problem for the care-takers since they have to be there even if one child is left behind. The play school instituted a fine to address the problem. Those who come late are asked to pay a fine. The idea was that such a fine would encourage almost all parents to come on time. However, surprisingly, such a fine has encouraged many parents to be late in collecting their children.

Most of them were coming on time earlier due to the feeling that it is not right to come late and force the care-takers to be there beyond their normal working hours. Or an intrinsic motivation has played a role there. On the other hand, when the fine is in place, these parents have thought that the extra time of the care-takers could be bought without any ill feeling. This is a case where the institution of financial incentive has led to the disappearance of intrinsic motivation!

Market is one form of exchange and that need not be the ideal one in all circumstances (despite the fact that it works well in the case of many goods and services). For example, this is discussed in the case of donation versus marketing of blood. People who donate or sell blood have information on their actual health condition. (The transfusion of blood taken from people with a recent history of diseases like Hepatitis could be harmful for the recipient). People who donate blood have the incentive to reveal information on their actual disease history. On the other hand, those who sell the blood may not have the incentive to do so. Hence blood donation is a superior form of exchange since it retains the incentive to reveal relevant information. Moreover blood donation may decline or disappear, if blood market (wherein it is sold and bought like any other marketable commodity) is allowed widely. People who donate blood do so out of a concern for the patient. People may not be willing to donate blood when it can be bought easily from the market. Society cannot differentiate that easily between those who sell blood and those who donate it. These may dampen the spirit of altruistic donors of blood. Hence allowing market-exchange in this case could lead to the disappearance of non-market (or altruistic) forms of exchange. This is costly to the society since the latter is a superior form of exchange for this particular item.

Though these may look uncommon examples, these insights are relevant in the case of public services like education and health-care and also the functioning of not-for-profit organizations. Some may argue that teachers need to have higher levels of intrinsic motivation in order to be effective.  The situations in which financial incentive works against the expected work in an organization are not unusual in the case of schooling or other social services in India. There are indications that sections of teachers in private schools in India compel their students to undergo private tuitions (as this is a way of generating some additional income for them who are not well paid). Hence such teachers may not do their normal task well so as to encourage students to go through tuitions. One can see doctors in government hospitals compel patients to pay a bribe in India. Even to get an expected service in government hospital (say, to see that the surgery is done properly), patients may have to pay money to doctors and paramedical staff.

Let us think about a hypothetical case. What if government allows teachers in government schools to charge a fee to provide extra attention to those children who need such assistance? One should not be surprised then in seeing some teachers compelling even those children who may not need such extra-assistance to pay a fee (probably by not delivering what is expected from them without the extra-charge). Whether a teacher has given due attention to a student (which is expected from the teacher normally) is something that cannot be monitored easily by a third-party (including head teachers). Hence we need to be concerned about instituting financial or market incentives as a way to improve the performance of school teachers. For these and other reasons, there is a need for government schools, and that is discussed here.

This does not mean that all teachers have the required intrinsic motivation or that ineffectiveness is not an issue in public organizations. How do we address this issue then? Multiple strategies are attempted with different degrees of success. First is the internal hierarchical control.  The government school may have multiple layers of supervisors to ensure that it performs its role adequately. However these authorities should have the motivation to do their jobs well. The effort required to see that this multi-layer hierarchical system works could be substantial. There can be some teachers with a higher level of intrinsic motivation. They can exercise peer pressure directly or directly (that is, by being role models). However, these internal mechanisms per se is not adequate. Public organizations have to be made accountable through the `voice’ option of the users (like parents). Such a voice option is important to ensure the effectiveness of the internal hierarchy too. However the `voice’ option will be effective only with a set of users who are capable and interested to improve the performance of government schools. This may need parents who demand education not only by sending kids to schools but also by ensuring that they learn; who know what they want from the school to improve the education of their kids; a situation where most parents who send children to  a school can come together by solving collective action problems; and so on. These may depend on a number of socioeconomic factors and a levels of social/human development of the context. What about the situation in India in this regard? We will discuss this in another essay.