Two economic models are used to examine the costs and benefits of Payment by Results, relative to other forms of aid. First, the principal agent model provides a framework to consider the most important factors, with a focus on linking the agent’s payoff to an outcome which the principal is concerned with. Much of the promised benefit of Payment by Results is related to the effciency improvement that comes by linking an agent's payment to an outcome of the principal's interest. Second, the multitask model draws attention to the requisite characteristics of a good measure: it is not enough to be correlated with the desired outcome. The actions needed to improve a performance measure should be similar to those needed to improve the actual outcome that motivates the principal.
The two models, and various second order effects, are summarised by a single question: do the benefits of the performance based contract outweigh the costs, relative to other forms of aid? Six headings are used to group factors which will affect the likely costs and benefits. This provides a viable framework to consider the appropriateness of a results-based contract in any given setting, underpinned by the relevant conceptual and theoretical research. Several examples are given of how the framework could be implemented, and three main research gaps are identified.
Clist, P.; Verschoor, A. The Conceptual Basis of Payment by Results. University of East Anglia, Norwich, UK (2014) 31 pp.