Financial Incentives are Counterproductive in Non-Profit Sectors: Evidence from a Health Experiment

Abstract Financial incentives for service providers are becoming a common strategy to improve service delivery. However, this strategy will only work if demand for the service responds as expected. Using a field experiment in the Democratic Republic of Congo, we show that introducing a performance-based financing mechanism in the health sector has counterproductive effects because demand is non-standard: despite reduced prices and eased access, demand for health decreased, child health deteriorated, workers' revenue dropped. Ironically, expected perverse effects of incentives on worker behavior were not realized: incentives led to more effort from health workers on rewarded activities without deterring effort on non-rewarded activities, nor inducing significant score manipulation or free-riding. We also find a decline in worker motivation following the removal of the incentives, below what it would have been in the absence of exposure to the incentives. Management tools used in for-profit sectors are thus inappropriate in non-profit sectors such as health where user and worker rationalities are specific.