In a new paper,
This paper reports an experiment in over 3,000 Indonesian villages designed to test the role of performance incentives in improving the efficacy of aid programs. Villages in a randomly-chosen one-third of subdistricts received a block grant to improve 12 maternal and child health and education indicators, with the size of the subsequent yearâ€™s block grant depending on performance relative to other villages in the subdistrict. Villages in remaining subdistricts were randomly assigned to either an otherwise identical block grant program with no financial link to performance, or to a pure control group. We find that the incentivized villages performed better on health than the non-incentivized villages, particularly in less developed provinces, but found no impact of incentives on education. We find no evidence of negative spillovers from the incentives on untargeted outcomes. Incentives led to what appear to be more efficient use of block grants, and led to an increase in labor from health providers, who are partially paid fee-for-service, but not teachers. On net, between 50-75% of the total impact of the block grant program on health indicators can be attributed to the performance incentives.
Cash-on-delivery aid critics and proponents should give this a good read. Of course, it won’t settle any arguments, but provides some interesting evidence. A couple of thoughts:
- The authors find that there are no Milgrom & Holstrom-type external spillovers (i.e. you start paying me to publish more so I start publishing in worse journals) and deduce that non-targeted indicators might have benefited from the extra effort. One caveat: they only look at non-targeted indicators within the domains of health and education, so we can’t say what happened to indicators outside of this domain that went unobserved or unreported.
- Prior to the intervention, the optimal allocation of funds was unknown, but it seems that the villages solved it: the extracted inefficient spending on school materials and re-allocated it to health. As far as black box solutions go, this is great – but note that the only thing that might have kept educational performance constant was the addition of the performance measures.
- The performance measures were relative to other sub-districts, so there was no set `target’ that villages had to meet, so not as much scope for threshold effects (slacking off because you confident you will meet the target or that the target can never really be met).
One question we should be asking ourselves when we try and tie this to cash-on-delivery aid: how might a village respond differently to incentives than a national government?
Hat tip to Chris Blattman