Performance and Management in the Public Sector: Testing a Model of Relative Risk Aversion

• Author: Sean Nicholson‐Crotty,Jill Nicholson‐Crotty,Sergio Fernandez
• DOI: http://doi.org/10.1111/puar.12619
• Published date: 01 July 2017
• Date: 01 July 2017

Performance and Management in the Public Sector: Testing a Model of Relative Risk Aversion 603

Public Administration Review,

Vol. 77, Iss. 4, pp. 603–614. © 2016 by

The American Society for Public Administration.

DOI: 10.1111/puar.12619.

Sergio Fernandez is associate

professor in the School of Public and

Environmental Affairs at Indiana University,

Bloomington, and visiting professor in

the Department of Public Management

and Governance at the University of

Johannesburg, South Africa. His research

focuses on organizational behavior in the

public sector, government contracting

and procurement, and representative

bureaucracy.

E-mail : sefernan@indiana.edu

Jill Nicholson-Crotty is associate

professor in the School of Public and

Environmental Affairs at Indiana University,

Bloomington. Her research focuses on

the management of public and nonprofit

organizations as well as on the role of race,

gender, and representation on the outcomes

of public programs.

E-mail : jillnich@indiana.edu

Sean Nicholson-Crotty is professor

in the School of Public and Environmental

Affairs at Indiana University, Bloomington.

His research focuses on the management

of public organizations, intergovernmental

relations, and the diffusion of policy

innovations among governments.

E-mail : seanicho@indiana.edu

Abstract : Research has demonstrated that management influences the performance of public organizations, but

almost no research has explored how the success or failure of a public organization influences the decisions of those

who manage it. Arguing that many decisions by public managers are analogous to risky choice, the authors use a

well-validated model of relative risk aversion to understand how such choices are influenced by managers’ perceptions

of organizational performance. They theorize that managers will be less likely to encourage innovation or give

discretion to employees when they are just reaching their goals relative to other performance conditions. Analyses of

responses to the 2011 and 2013 Federal Employee Viewpoint Surveys provide considerable support for these assertions.

The findings have significant implications for our understanding of the relationship between management and

performance in public organizations.

Practitioner Points

• Perceptions of performance influence the likelihood that public managers will engage in risk-taking behavior.

• Public managers are less likely to take risks as performance begins to meet expectations than when

performance falls short of or exceeds expectations.

• The willingness of public managers to embrace organizational change, such as process innovations or

employee empowerment practices, is likely a function of current organizational performance.

O ver the past several decades, a large and

growing literature has demonstrated quite

convincingly that management matters

for the performance of public organizations. It has

shown that the decisions public managers make—

including whether to collaborate with stakeholders

in the environment, create green rather than red tape

within their organizations, and empower employees to

innovate, among others—have a significant impact on

the success of public organizations and programs (see,

e.g., DeHart-Davis 2009 ; Fernandez and Moldogaziev

2013 ; Meier and O ’ Toole 2002 ). In many ways, the

relationship between management and performance

undergirds the modern administrative state and the

systems that define it (Moynihan and Pandey 2005 ).

Scholars typically treat the relationship between

management and performance as nonreciprocal,

assuming that one influences the other but that

the inverse is not true. As a result, almost no work

has explored how the success or failure of a public

organization influences the decisions of those who

manage it. This is a potentially significant oversight

because if performance is in fact endogenous to

management, this could cause us to substantially

overestimate the importance of the latter. In other

words, if public managers in high-performing

organizations make systematically different decisions

than those in poor-performing organizations, we

might attribute organizational success to those choices

when causality is actually running in the other

direction.

Fortunately, very recent research has begun to address

this shortcoming by theorizing about the impact

of performance on managerial behavior in public

organizations (Meier, Favero, and Zhu 2015 ). While

acknowledging the importance of that work, we

will, for a variety of reasons, suggest an alternative

approach to understanding the relationship between

performance and management. Specifically, we use

a relative risk model from the private management

literature in order to understand how several major

types of decisions made by public managers are

influenced by the performance of their organizations.

This is a well-validated approach to decision making

that suggests that risk tolerance is a function

of performance relative to the decision maker ’ s

goals or aspirations. Many managerial behaviors

advocated by modern management theories—

including the encouragement of innovativeness and

entrepreneurial behavior, employee empowerment,

Sean Nicholson-Crotty

Jill Nicholson-Crotty

Indiana University, Bloomington

Sergio Fernandez

Indiana University, Bloomington

University of Johannesburg, South Africa

Performance and Management in the Public Sector:

Testing a Model of Relative Risk Aversion