Performance Incentives Versus Prices Versus Quantities.

The paper contains an analysis of the performance incentive function which prescribes a reward received by producers as a function of their output and their costs. Specifically, there is a comparison of the degree to which performance incentives, prices, or prescribed quantities achieve allocative efficiency. When one good is being controlled, it is proved that a performance incentive function can be constructed which achieves the centers objective and yet which does not require any knowledge by the center of the producers cost function. The second-best solution achieved with performance incentives when more than one good is being controlled is also discussed. Author