Preliminary and Incomplete

Do not quote Abstract: We present a model of how organizations manage performance measures when gaming is revealed over time. The incentive designer does not know when it selects a per-formance measure whether it will communicate the right behavior. Only over time does the principal find out the agent’s responses and then uses this additional information to update and fine-tune the incentive system. Using data from a government organization, we test the model’s main prediction that the correlation between a performance measure and the true goal of the organization should change after the performance measure is included in the incentive system and we find some evidence consistent with this hypothesis. (JEL H72, J33, L14