Incentives and latent shirking

In a simple model of bureaucracy under imperfect information, we show that increased potential for shirking can lead to higher effort levels and productivity. As even non-shirkers benefit from compensation schemes designed to deter opportunistic behavior, the latent propensity to shirk can create a positive spillover effect on dedicated bureaucrats. We also show that, since both leisure and monetary rewards raise the expected utility of bureaucrats, the government may trade off incentive payments with on-the-job leisure, without affecting social welfare.