Journal of Public Administration Research And Theory, 2018, 1–17

doi:10.1093/jopart/muy048
Article

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Article

A Behavioral Model of Public Organizations:

Bounded Rationality, Performance Feedback,
and Negativity Bias
Sounman Hong
Yonsei University

Abstract
In this study, we examine organizational responses to performance management in the public sec-
tor by studying Korean public agencies’ responses to their annual performance feedback. In doing
so, we employed a regression discontinuity design that exploits the relationship between perfor-
mance grades and the numeric inputs that determine the grades to uncover the impact of perfor-
mance management on performance. Evidence suggests that the social and historical aspirations
of public organizations significantly influence their performance improvement, as predicted by
behavioral theory. We also report evidence supporting the switching aspiration hypothesis; organi-
zations performing below the mean performance of similar others aspire to the average, whereas
organizations performing above the mean aspire to improve performance relative to their own his-
torical positions. Overall, our findings provide broad support for the existence of negativity bias in
public managers’ decision making as well as for the relevance of behavioral theory and bounded
rationality in the context of public administration.

Introduction than maximizing performance achievements (Gavetti

The book A Behavioral Theory of the Firm (Cyert and
March 1963) has had an enormous influence on the
scientific study of organizational behavior, strategic
management, and administration. A  central idea of
behavioral theory is that the past performance of an
organization shapes its behavior, which in turn affects
its future performance (Cyert and March 1963; Gavetti
et  al. 2012; Levitt and March 1988; Shinkle 2012).
This idea has led scholars to explore whether and
how performance feedback influences organizational
behaviors (Greve 1998, 2003). The resulting empirical
evidence shows that the impact of feedback has differ-
ent consequences for high- and low-performing organ-
izations as organizational changes are motivated by
the goal of overcoming performance shortfalls rather
The author would like to thank the anonymous reviewers and editors
for their truly constructive comments. Address correspondence to the
author at sounman_hong@yonsei.ac.kr.
et al. 2012; Shinkle 2012).
The cognitive foundation for this evidence is that
individuals do not “maximize” but rather “satisfice,”
as they are boundedly rational (Simon 1947); manag-
ers of organizations try to find a course of action that
is “good enough,” which satisfies or exceeds a set of
minimal acceptability criteria, rather than search for
the best alternative. What is deemed “good enough”
depends on the aspiration level—the level of perfor-
mance in specific outcomes desired by the organiza-
tion—which depends on several factors, including
the performance history of the organization, called
historical aspiration, and the performance of other
comparable organizations, called social aspiration.
According to this view, performance below the aspi-
ration level triggers a problem-driven “search” (i.e.,
organizational problem solving) for solutions result-
ing in organizational changes for improving future
performance.

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2 Journal of Public Administration Research and Theory, 2018, Vol. xx, No. xx
Since an organization’s behavior is shaped by the dis-
crepancy between performance and aspiration, under-
standing how organizations set this reference point is
central to studying the decision making of any organi-
zation. Despite this being a crucial subject, past studies
have substantially differing views on how organiza-
tions determine their aspiration levels (see Shinkle 2012
for a review).1 Although the literature on performance
feedback mentions the relevance of historical and
social aspiration, there has been no consensus on the
relative importance of these two factors (Greve 2003;
Ma 2016; Meier et al. 2015; Shinkle 2012). Recent evi-
dence suggests that social aspiration may have greater
overall relevance (e.g., Mishina et al. 2010), especially
in the context of the public sector (Charbonneau and
Van Ryzin 2015; Olsen 2017; Salge 2010), but some
studies still report the significant influence of histori-
cal aspiration (e.g., Holm 2017; Iyer and Miller 2008).
This disagreement may have resulted, at least in part,
from the difficulty that researchers must have faced in
defining the proper social comparison group for the
studied organizations (Moliterno et al. 2014).
In this study, we examine whether and how perfor-
mance feedback influences subsequent improvement in
organizational performance. In doing so, we propose
a model according to which the aspiration level of an
organization switches conditional on its performance.
An organization with performance below its social
aspiration is primarily motivated to close the gap
between its performance and its social aspiration level.
However, once the performance exceeds the social
aspiration, the level of historical aspiration becomes
increasingly relevant, and the organization is moti-
vated to improve its performance in relation to the his-
torical rather than the social aspiration level. Although
this idea has already been proposed (Bromiley 1991),
there has been little empirical investigation on it.
This study also offers an empirical test of this pro-
posed model. Specifically, we examine how the perfor-
mance of public organizations changes in response to
feedback provided by a centralized performance evalu-
ation system implemented as part of the so-called new
public management reform. In Korea, public organiza-
tions (such as state-owned enterprises and quasi-gov-
ernment organizations) that are de facto controlled by
central government ministries are subject to an annual
performance evaluation. In this performance man-
agement system, public organizations are evaluated
according to a continuous score, but each organization
is assigned a letter grade (from A to E) based on sharp
cutoffs. As the letter grades (as opposed to the continu-
ous score) are published and linked to rewards or sanc-
tions, the discontinuities inherent in the assignment of
1 This study follows Shinkle (2012) to treat aspirations, goals, targets, and
reference points as the same concept.
letter grades provide an opportunity to examine the
effectiveness of performance feedback in motivating
public organizations. We take advantage of this oppor-
tunity and employ a regression discontinuity (RD)
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design to uncover the impacts of this accountability
mechanism.
We seek to make three primary contributions to the
literature on public administration, strategic manage-
ment, and organizational behavior. First, we extend the
behavioral arguments of organizational performance
into the public sector to promote a fruitful exchange
of ideas among these different strands of literature.
Second, we contribute to the behavioral theory of
performance feedback by combining two theoretical
mechanisms: (1) performance improvement following
feedback is driven by performance that is below the
aspiration, and (2) which aspiration is more relevant
depends on the level of organizational performance.
Third, we provide empirical evidence on how organi-
zations respond to performance feedback by employ-
ing a quasi-experimental RD design.
Before we proceed, we need to mention three seman-
tic issues. First, we used the term “behavioral theory”
to describe the bounded rationality view of organiza-
tional decision making in the tradition of Simon (1947)
and Cyert and March (1963). That is, we used the
term “behavioral” since our hypotheses were built on
the assumption that public managers are boundedly
rational (i.e., they satisfice rather than maximize). We
acknowledge, however, that this definition of “behavio-
ral theory” is much narrower than how it is generally
used in the field of behavioral public administration
(e.g., Tummers et al. 2016). Second, this study evaluates
the impacts of performance feedback, which is just one
aspect of the performance management cycle. Other
elements may include training, leadership meetings,
use of performance information for planning and deci-
sion making, and provision of rewards or sanctions, to
name a few. The system we studied included many of
these key elements; for instance, the evaluated agencies
participate in information and training sessions before
the evaluation, they receive postevaluation consulting
services, and the performance outcomes are linked to
either rewards or sanctions. Hence, we used the terms
“performance feedback” and “performance manage-
ment” interchangeably. Third, we sometimes used the
term “organization” as a substitute for “public manag-
ers.” Although such anthropomorphizing of “organiza-
tion” is common in the field of organizational behavior
in business management, we regard this practice as
problematic since it may obscure the complex dynamics
among various actors. Nevertheless, we followed this
practice on many occasions as we gained an impression
from several agency employees we encountered during
our research that top executives, mid-level managers,
and labor union leaders might have somewhat different
Journal of Public Administration Research and Theory, 2018, Vol. xx, No. xx
and often-conflicting incentives during the process. We
thus used the term “organization,” leaving the identifi-
cation of the complex dynamics within organizations
as a topic for future research.
Performance and Management in the Public Sector
Previous studies on performance management in the
public sector may be grouped into several broad cat-
egories. The first line of research has identified organi-
zational, institutional, and cultural factors that explain
variations in the effectiveness of a performance man-
agement system (see Andrews 2014; Gerrish 2016;
Heinrich and Marschke 2010 for a review). Specifically,
studies have stressed the importance of goal clarifica-
tion (Chun and Rainey 2005; Poister et al. 2013), meas-
urement and reporting of performance (Ammons and
Roenigk 2014; Behn 2003), managerial authority over
human resources (Han and Hong 2016; Nielsen 2014),
leadership meetings (Behn 2014), training (Kroll and
Moynihan 2015), supportive organizational culture
(Brewer and Selden 2000), insulation from political
influence (Gallo and Lewis 2011; see also Lavertu and
Moynihan 2012), and the use of performance infor-
mation in planning and decision making (Moynihan
and Pandey 2010) for the successful implementation
of performance management systems. Scholars have
also investigated the consequences of performance
management implemented in public education in the
United States to identify the key success factors of
these reforms (e.g., Carlson et al. 2013; Favero et al.
2014; McDermott 2004).
The second and third groups of literature have
examined how various stakeholders use performance
information. On the one hand, scholars have explored
the determinants of performance information use by
public managers. This group of scholarship has dem-
onstrated that public managers’ use of performance
information is associated with various factors, includ-
ing the provision of adequate resources (Julnes and
Holzer 2001; Moynihan and Landuyt 2009), legis-
lative involvement (Bourdeaux and Chikoto 2008;
but see Dull 2008; Moynihan and Ingraham 2004),
bureaucratic competence (Bourdeaux and Chikoto
2008), administrative stability (Askim et  al. 2007),
and public service motivation (Moynihan and Pandey
2010). On the other hand, another group of scholars
has investigated how elected officials and voters use
performance information. This scholarship has dem-
onstrated that elected officials and voters place more
weight on negative rather than positive performance
information (Boyne et al. 2009; James and John (2006);
Nielsen and Moynihan 2017). This negativity bias may
arise because of the greater psychological intensity of
negative information (Lau 1982; Rozin and Royzman
3
2001) or politicians’ responsibility attribution process
to public managers (Nielsen and Moynihan 2017).
Lastly, a body of scholarship has used behavioral
theory in the tradition of Cyert and March (1963) to
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understand the impacts of performance feedback (i.e.,
how past performance of an organization shapes man-
agers’ decision making, thereby affecting its future
performance). A large body of work in public admin-
istration has adopted behavioral approaches in the
study of performance management (e.g., James et al.
2017; James and Olsen 2017; Moynihan et al. 2017;
Tummers et al. 2016). Nevertheless, we still argue that
public administration scholars have paid relatively lit-
tle attention to the behavioral consequences of per-
formance feedback in particular. As Nicholson-Crotty
et  al. (2017, 603)  observed, “Almost no work has
explored how the success or failure of a public organi-
zation influences the decisions of those who manage
it.” Lack of evidence on performance feedback in the
context of public agencies is an important omission in
the public administration literature given the critical
importance of performance evaluation in the manage-
ment of governments. Further, this lack of attention
is even more puzzling as governmental organizations
are the very types of entities where decision makers
are expected to satisfice rather than maximize (Simon
1947). This is because governments operate in com-
plex institutional environments with multiple and
mutually inconsistent logics and ambiguous goals,
in which the assumption of “satisficing” (as opposed
to “maximizing”) is more likely to hold (Greenwood
et al. 2011).
This study contributes to this last strand of per-
formance management research by making several
theoretical and empirical advancements. The current
research is unique in that it explores how an exter-
nally enforced performance management system can
influence the behaviors of evaluated governmental
agencies. From a theoretical perspective, this study
is close to Meier et  al. (2015) and Nicholson-Crotty
et al. (2017). Although acknowledging the importance
of such work, this study proposes an alternative model
that is more consistent with behavioral theory in the
tradition of Cyert and March (1963). For instance,
Nicholson-Crotty et  al. (2017) proposed a model in
which both low and high performers have greater risk
tolerance. Our model may produce a similar implica-
tion, but it is more compatible with the assumption of
“satisficing” (Simon 1947). Specifically, we make theo-
retical improvements by modeling social and historical
aspirations as separate variables and are clear about
the behavioral assumptions we make. Our work is also
unique as it presents rigorous empirical evidence using
a RD design.
4 Journal of Public Administration Research and Theory, 2018, Vol. xx, No. xx
Hypotheses
The behavioral model of organizations postulates that,
as decision makers are boundedly rational and lack per-
fect information, they must seek information (Cyert and
March 1963; Simon 1947). The search process stops
when a satisfactory alternative is found, whereas a new
search is triggered when performance remains unsatisfac-
tory (hereafter, the “satisficing assumption”). Whether
an alternative is satisfactory depends on the comparison
between the performance and the aspiration level. Cyert
and March (1963) introduced the concepts of historical
and social aspirations as the primary determinants of
an organization’s aspiration level. Previous research has
found clear evidence that performance below the aspi-
ration level induces organizational change and learning
(e.g., Flink 2018; Holm 2017, 2018; Ma 2016; Nielsen
2014; Olsen 2017; Salge 2010).2
Between the two types of aspirations (i.e., histori-
cal and social), which has greater relevance depends on
their relative salience. For instance, if the social compar-
ison group is not clearly defined for an organization, the
aspiration level will be more influenced by the histori-
cal than by the social reference. However, in a context
where a firm competes in a duopoly market, the social
referent would become more dominant. Similarly, if an
organization has experienced an idiosyncratic event in
the past, which makes it difficult to form a relevant his-
torical reference point, the reliance tends to be more on
social aspiration to determine the aspiration level.
This study uses evidence from a performance man-
agement system that evaluates the annual performance
of public agencies. This system clearly defines the social
comparison group for the evaluated agencies. The out-
come of the evaluation is determined by comparing an
organization’s performance in relation to the average
performance of its peer group. This is an advantage
given the difficulty of defining a clear social reference
group as reported in prior research (Shinkle 2012). The
availability of information on the social comparison
group, as officially and clearly defined by the central
regulator, suggests that social aspiration may be more
salient and relevant for the evaluated agencies than his-
torical aspiration. We therefore hypothesize as follows:
H1: 
Performance below social aspiration increases
an organization’s motivation for performance
improvement.
However, the salience of social aspiration does not nec-
essarily rule out the relevance of historical aspiration.
2 Holm (2017) considered political aspiration in place of social aspiration.
Political aspiration is defined as “a coercive and externally set
aspiration level in the form of a political goal” (Holm 2017, 1029). Holm
(2017) suggests that historical aspiration may have greater relevance
than political aspiration, especially when the two produce conflicting
signals.
The importance of historical aspiration may especially
increase when the social reference point is no longer
relevant. Such a case may occur in organizations
already outperforming their similar others and having
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their social aspirations already satisficed. For instance,
when an organization that has outperformed its peers
shows a decrease in performance relative to the organi-
zation’s own historical performance, it may be a matter
worth investigation. In such a group of organizations,
performance relative to social aspiration is a second-
ary concern so long as it maintains a position superior
to its peer groups; instead, the performance relative
to historical aspiration becomes the primary interest.
Given these possibilities, we offer the following two
hypotheses, of which the latter, or the third, hypothesis
is labeled the switching aspiration hypothesis.
H2: Performance below historical aspiration increases
an organization’s motivation for performance
improvement.
H3: Organizations performing below social aspiration
strive to outperform the social referent, whereas
organizations performing above it strive to out-
perform the historical referent.
The hypothesized relationship between performance-
aspiration gaps and motivation for performance
improvement is shown in figure 1. The figure shows that
both historical and social aspiration levels clearly func-
tion as valid reference points, but the relative importance
of the two switches is conditional on the organization’s
performance level. We predict that this theoretical rela-
tionship will hold in any circumstance in which a rel-
evant social comparison group is clearly defined.
To clarify, this study followed the tradition of Simon
(1947) and Cyert and March (1963) to assume that
the bounded rationality of public managers is a source
of the “satisficing assumption.” We still acknowledge,
however, that there might be alternative explanations
for this phenomenon. For instance, the negativity bias
observed from the behaviors of elected officials and
citizens may also contribute to this assumption (Boyne
et  al. 2009; Hood 2010; Marvel 2015; Nielsen and
Baekgaard 2013; Nielsen and Moynihan 2017; Olsen
2015; Weaver 1986). Although we admit that it may be
important to identify the relative validity of these claims,
this study nonetheless accepts the “satisficing assump-
tion” without further investigations of its origins.
Institutional Background and Empirical
Strategy
Institutional Background
The evidence for this study comes from the results of
annual performance evaluations of public organiza-
tions (hereafter, “agencies”) during 2014 and 2015
Journal of Public Administration Research and Theory, 2018, Vol. xx, No. xx
Figure 1.  Theoretical Relationship between Performance-Aspiration Gaps and Motivation for Performance Improvement
in Korea. These agencies include state-owned utilities
(electricity, gas, coal, railway, airport, seaport, high-
way, water, etc.) and other organizations that are de
facto controlled by the central government ministries
of Korea.3 The institutional structure of the Korean
public sector is unique in that the size of these agen-
cies as measured by the sum of their budget is even
larger than the size of the central government’s entire
budget. In 2013, the Korean central government’s
budget expenditure amounted to about 356,000 bil-
lion Korean won, whereas the budget expenditure
of all these agencies combined amounted to about
575,000 billion Korean won (which comprises 44.3%
of the total gross domestic product). Due to their unu-
sually large size, discussions on how to make these
organizations more efficient, effective, and innovative
were often part of the top policy agendas of the Korean
government.
In tandem with the “new public management”
(NPM) wave of management reforms across the
world, the Korean government introduced a perfor-
mance evaluation system for these agencies in 1983.
This public management system underwent a major
change in 2007, but it continues to remain the central
government’s primary instrument for holding these
organizations accountable (Hong 2016; Hong and
Kim 2017). The performance of these agencies is evalu-
ated both qualitatively and quantitatively. Qualitative
evaluation is conducted by an independent commit-
tee of experts including professors, accountants, and
lawyers, all appointed by the regulator. Quantitative
3 As of August 2014, there were 303 agencies in Korea and 116 of them
were subject to performance evaluation. The list of agencies subject
to performance evaluation is determined by the Korean central
government based on the size of the agencies, the nature of business
they operate, and the government’s policy considerations.
5
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evaluation is based on the following predefined for-
mula agreed upon between the regulator and the
agencies before the evaluation. Both qualitative and
quantitative evaluations produce scores on a 0- to
100-point scale, the average of which produces the
final score on a 0–100 scale. In this study, we linearly
transformed this final score so that it has a mean of
zero and a standard deviation of one. We performed
this “standardization” to make the final scores com-
parable over time.
The results of the performance evaluation are pub-
lished annually, and the performance of each agency
is evaluated based on its final score as A  (excellent),
B (average), C (average), D (poor), or E (very poor).
Each of these grades shows the position of an agen-
cy’s performance relative to the average score of all
the evaluated agencies. Figure 2 shows the process of
determining the grading. As seen in figure 2, the aver-
age score of all the evaluated agencies lies between the
scores for grades B and C.4 Grade A  is given only if
the score is greater than the average plus one standard
deviation,5 grade D if the score is below the average
minus one standard deviation, and grade E if the score
is below the average minus 2 standard deviations. As
the final grade is determined by considering the aver-
age and standard deviation of all scores, an organi-
zation should do better than the others to receive a
4 Of note, the average and the standard deviation are calculated for
two separate groups. Among the 116 agencies, 55 had less than 500
employees, and were smaller than the rest. The average, the standard
deviation, and therefore the grades are determined separately for
these small entities and the rest.
5 If the score is greater than the average plus two standard deviations,
grade S is given. However, no agency has received an S grade since
2012.
6 Journal of Public Administration Research and Theory, 2018, Vol. xx, No. xx
Figure 2.  Distribution of Performance Scores and Grades. Note: Histogram for standardized performance scores of the evaluated public
agencies in 2014 and 2015; the straight vertical line shows the average score, whereas the dotted vertical lines are the average plus or
minus one or two standard deviations.
satisfactory grade. As of 2014 and 2015, 116 agencies
were subject to the evaluation.6
The results of the performance evaluation have both
symbolic and substantive importance for the agencies’
executives and employees. First, it has an impact on
the executives who usually aim to climb to significant
positions such as becoming a minister or a key advisor
to the president. They show a keen interest in receiving
a “good” grade. To these ambitious executives, perfor-
mance feedback has critical symbolic value; an A grade
validates their expertise and management skills.
Second, the regulator provides monetary rewards to
executives and employees of the evaluated agencies
that receive A (excellent), B (average), or C (average).
The monetary reward for achieving grade A  is twice
as much as that for achieving average grades. There
is no financial incentive attached to receiving grades
D and E. In fact, agencies that received a D or E may
face formal sanctions; if a chief executive had worked
for longer than six months as of the year-end, he or she
may be fired upon receiving either an E or D grade for
two consecutive years.
Empirical Strategy
The method by which the final grade is assigned pro-
vides a unique opportunity for researchers to estimate
the impact of performance feedback. The performance
6 One observation (Korea Securities Depository) was removed from
our sample as it was subject to evaluation only in 2014, which made
it impossible to construct the dependent variable (i.e., performance
improvement).
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of 116 agencies is evaluated as a continuous score, but
the results are published as five grades. As the regulator
does not publish the performance scores on a continu-
ous scale, the agencies know only their grades but not
their scores. In this set-up, we first show a simple asso-
ciation between the performance-aspiration gap calcu-
lated using the grades the agencies received and their
subsequent performance improvements. However, a
legitimate concern here is that agencies that received a
certain grade (e.g., an A grade) may be significantly dif-
ferent from agencies that received another grade close
to A (e.g., a B grade) in many characteristics unobserv-
able to researchers.
To resolve this problem, we implement a RD
approach by exploiting the sharp discontinuities
between grades. Essentially, we assume that the dis-
tribution of unobservable characteristics of agencies
changes smoothly across grades. Based on this assump-
tion, we examine whether a meaningful difference
exists in terms of future performance improvement
between the agencies located just above and just below
each of the thresholds (i.e., cutoffs or discontinuities)
between grades. For instance, we estimate the impact
of positive feedback by looking at the difference in
future performance improvement between organiza-
tions that received an A grade with their scores barely
above the cutoff and those that failed to receive an
A (i.e., among those that received B) as their scores fell
slightly short of it.
In our case, the RD approach can produce a cred-
ible estimate of performance feedback since the cut-
offs that classify the five grades are plausibly randomly
Journal of Public Administration Research and Theory, 2018, Vol. xx, No. xx
and exogenously set, and so is the resulting change in
future performance. The five grades are determined
by the distribution (i.e., average scores and standard
deviation) of the evaluated scores of the 116 agencies.
For instance, an agency gets an A grade if its score is
greater than the average plus one standard deviation.
In such circumstances, there is no room for managers
of evaluated organizations to manipulate or predict the
levels of the cutoffs.
Another unique feature of our data is that the social
comparison group is clearly defined by the system itself.
Private sector research has generally specified social
aspiration level as the average performance of an indus-
try-wide reference group (e.g., Bromiley 1991; Greve
1998; Miller and Chen 2004). Meanwhile, research in
public administration used the average performance of
schools in the same municipality (Nielsen 2014; Olsen
2017), provincial governments with geographic prox-
imity or similar level of economic affluence (Ma 2016),
and public hospitals belonging to the same strategic
reference group (Salge 2010). In the case we studied,
however, as a performance grade is determined by com-
paring an agency’s score with the mean score of all
the evaluated agencies, we regarded the average as the
social aspiration level. In this regard, the grades reveal
the gap between performance and social aspiration; for
instance, an A grade suggests that performance is above
social aspiration, whereas a D or E grade indicates that
performance is below the social reference point.
Methods and Data
Operationalization of Performance-Aspiration Gaps
This study leverages the results of performance eval-
uation of Korean public organizations to examine
whether performance feedback provided in 2014 and
2015 had any impact on subsequent performance in the
following years (i.e., changes in performance score dur-
ing the periods 2014–15 and 2015–16, respectively).
Specifically, we use both OLS and RD approaches, and
this section describes these two models.
However, before we go into a description of the
models, we first clarify how we measured social and
historical aspirations. As explained, previous studies
often used the mean performance of an industry-wide
reference group as the social aspiration level. In our
case, the outcomes of the performance evaluation are
graded from A to E. B and C are widely perceived as
“average,” and A represents a performance score above
the social aspiration level (coded A = 1, as we explain
below); grades D and E represent performance below
the social aspiration level (coded D  =  1). Thus, our
sample is divided into three different groups depend-
ing on the performance relative to the social aspira-
tion level: organizations that received an A (i.e., A = 1),
7
those that received a D or E (i.e., D = 1), and the rest
(i.e., A = 0 and D = 0).
Meanwhile, historical aspiration is measured using
the performance data of the previous 2  years. In the
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previous literature, there is disagreement over the meas-
urement of the historical reference point; some stud-
ies use several years of prior performance, while others
suggest that 1-year data work better (e.g., Bromiley
and Harris 2014). In the current study, to construct
the historical aspirations for 2014 and 2015, we used
a weighted average of the performance of the previous
2 years giving 60% weight to the performance of the
previous year (i.e., 2013 and 2014) and 40% to the per-
formance of the year before (i.e., 2012 and 2013).7 We
then considered that performance exceeds the historical
aspiration level if the grades received in 2014 and 2015
exceeded the measured historical aspirations (coded
H = 0). Our sample is divided into two groups depend-
ing on the performance relative to historical aspiration:
organizations that showed an improvement in the per-
formance outcome (i.e., H = 0) and those whose perfor-
mance stagnated or deteriorated (i.e., H = 1).
OLS Model
In the OLS setup, the dependent variable is the meas-
ured level of performance improvement following the
performance feedback, whereas the treatment variables
are set as dummy variables (and their interactions) indi-
cating whether the performance was above or below
social and historical aspiration levels. Specifically, the
models used in this study are as follows:
∆Y = β0 + β1 A + β2 D + β6 X + ν (1)
∆Y = β0 + β1 A + β2 D + β3 H + β4 AH + β5 DH + β6 X + ν
(2)
where ∆Y is the dependent variable—an organiza-
tion’s measured level of performance improvement fol-
lowing performance feedback. Specifically, this variable
is measured by the change in the standardized continu-
ous performance score. The treatment variables A and
D are indicators of an organization’s performance rela-
tive to social aspiration, whereas H is an indicator of an
organization’s performance relative to historical aspi-
ration. As explained, the sample is divided into three
subsets depending on performance relative to social
aspiration and two subsets depending on performance
7 We assigned numerical values to each grade (i.e., 5 points to an A,
4 to B, 3 to C, 2 to D, and 1 to E). We then calculated the historical
aspiration level by taking the weighted average of each organization’s
performance grade of the previous two years, using 0.6 and 0.4 as
weights. We rounded off the resulting figure to obtain the historical
aspiration level as measured by the grade assigned (from A to E).
8 Journal of Public Administration Research and Theory, 2018, Vol. xx, No. xx
relative to historical aspiration. The model includes
a set of control variables X and an error term ν .
In equation (1), we estimate the impact of the dis-
crepancy between performance and social aspiration
level, whereas in equation (2), we estimate the impact
of both the performance-social aspiration gap and the
performance-historical aspiration gap together, as well
as their interactions.
RD Model
As the OLS model may not properly control for unob-
served heterogeneities, we employ an RD approach to
produce a more credible estimate. The discontinuities
relevant to our empirical strategy are the thresholds
that distinguish each of the grades. The RD design
is applied to the two discontinuities (i.e., the cutoff
between grade A  and below, and the cutoff between
grade D/E and above). The dummy variable indicat-
ing the performance relative to historical aspiration is
included as an interaction variable.
Our RD model is a global polynomial regression
that estimates the impact of performance above social
aspiration (i.e., A) and performance below social aspi-
ration (i.e., D) separately. We estimate the impact of
performance above social aspiration with the follow-
ing equations:
∆Y = β0 + β1 A + F ( S ) + β4 X + ν (3)
∆Y = β0 + β1 A + β2 H + β3 AH + F ( S ) + β6 X + ν (4)
Similarly, we estimate the impact of performance
below social aspiration with the following equations;
the variable A is simply replaced by the variable D:
∆Y = β0 + β1 D + F ( S ) + β4 X + ν (5)
∆Y = β0 + β1D + β2 H + β3 DH + F ( S ) + β6 X + ν (6)
where S is the forcing variable, the standardized contin-
uous performance score, and F(S) is a smooth function
of the forcing variable, modeled with a pth-order poly-
nomial that takes a different form below and above the
discontinuity. All other variables are defined as in equa-
tion (1). Running equations (3)–(6) after centering S at
the cutoff point, coefficient β1 becomes the treatment
effect at the cutoff point. In this study, we apply the
first-order polynomial of S to model F(S), but our results
remain highly robust, even in alternative specifications.
Data
The evidence is derived from the performance evalu-
ation results of Korean public agencies. The final out-
comes of the performance evaluation are published as
grades A to E, and all the listings are publicly available
at the webpage of the regulator. However, the perfor-
mance score on a 0–100 scale remains confidential
and is not disclosed to the public or to the evaluated
agencies. We obtained this confidential data set of the
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3-year results of performance evaluation (i.e., 2014,
2015, and 2016) from the regulator with permission to
use it strictly for research purposes. The treatment var-
iables are constructed using the performance outcomes
of years 2014 and 2015, whereas the dependent vari-
able is the performance improvement of the following
year, from 2014 to 2015, and from 2015 to 2016.
We also collected a number of control variables
from a public data set maintained by the regulator.8
To address the concern of a substantial variation in the
amount of resources (i.e., slack) among the evaluated
agencies, we included the amount of capital and labor
available to the evaluated agencies. Specifically, we con-
trolled for the annual budget expenditure, the number
of employees, and payroll size. We also included the
amount of vertical transfer from central governments
to control for variations in the degree to which agen-
cies are resource dependent on central governments.
We also included an indicator of whether the price of
the public service is regulated by the central govern-
ment as regulated industries such as electricity, gas,
water supply, railway may differ from other agencies
that deliver public service as delegated and instructed
by the central government. Finally, we added the year
fixed effect and dummy variables indicating three dis-
tinctive types of agencies: (1) state-owned enterprises,
(2) quasi-governmental organizations, and (3) small
institutions with less than 500 employees. This set
of indicators is included to further control for unob-
servable differences in terms of agency characteristics
and evaluation processes across organizations. All
the included control variables (except for the dummy
variables) are log-transformed. Table 1 shows the sum-
mary statistics for all variables included in the analysis.
Results
Descriptive Analyses
Before, we present the results of the OLS model, we
first show the descriptive statistics. In figure 3, we pre-
sent the association between performance-aspiration
gaps and subsequent performance improvements. In
both figure 3A and 3B, the vertical axis represents the
dependent variable of this study, ∆Y , an organiza-
tion’s performance improvement following feedback.
In figure 3A, the horizontal axis shows the final grade
an organization received after the performance evalu-
ation. As can be seen, organizations that received D
or E showed a greater increase in their scores than
8 These data are freely available at the website (www.alio.go.kr).
Journal of Public Administration Research and Theory, 2018, Vol. xx, No. xx 9

Table 1.  Descriptive Statistics

Variables Mean SD 1. 2. 3. 4. 5. 6. 7. 8. 9.

1. Performance 0.01 0.99 1.00

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improvement
2. Performance > SA 0.15 0.36 −0.20 1.00
3. Performance < SA 0.12 0.33 0.47 −0.16 1.00
4. Performance < HA 0.57 0.50 0.30 −0.34 0.24 1.00
5. Budget size 12.90 2.30 0.07 0.13 0.00 −0.01 1.00
6. Government 8.98 4.86 0.00 −0.04 −0.14 0.05 −0.02 1.00
transfer
7. Number of 6.40 1.32 0.04 0.16 0.01 −0.02 0.64 −0.09 1.00
employees
8. Payroll size 11.08 0.19 −0.01 0.11 0.02 0.12 0.40 −0.30 0.20 1.00
9. Price regulated 0.04 0.20 0.02 0.21 0.05 −0.07 0.34 −0.03 0.43 0.14 1.00

HA, historical aspiration; SA, social aspiration.

Figure 3.  Performance-Aspiration Gaps and Subsequent Performance Improvement: Descriptive Analyses

organizations that received a higher grade. As we
defined grades D or E as “performance below social
aspiration (D = 1)” while grade A was “performance
above social aspiration (A = 1),” figure 3A shows that
an improvement in performance is driven by organiza-
tions whose performance lies below social aspiration.
In figure 3B, the horizontal axis measures the degree
to which an organization’s grade improved in relation
to its historical aspiration. As explained, the level of
historical aspiration is the weighted average of the
performance of the previous 2 years. For instance, in
figure 3B, “3 down” is the case when an organization’s
grade went down three grades from the measured level
of historical aspiration (for instance, from grade A to
D), whereas “3 up” is the case when an organization’s
grade went up three grades from the historical refer-
ence point (for instance, from grade D to A). As can be
seen, if an organization receives a grade lower than the
historical reference point, there is generally a greater
increase in performance in the following year. In what
follows, we consider “performance above historical
aspiration” if an organization improved in terms of its
letter grade. Thus, in figure  3B, three categories (i.e.,
“1 up,” “2 up,” and “3 up”) qualify for “performance
above historical aspiration (H = 0),” whereas the rest
are coded “performance below historical aspiration
(H = 1).”
OLS Results
We now present the results of the OLS model with con-
trol variables and fixed effect. Equations (1) and (2)
are estimated and the results are reported in table 2. In
column 1 of table 2, there is clear evidence that organi-
zations with performance below social aspiration level
experience a larger subsequent performance improve-
ment, whereas organizations with performance above
social aspiration experience a decrease in their perfor-
mance. This result is consistent with our findings in
figure 3A. In column 2 of table 2, we include the per-
formance-historical aspiration gap and its interactions
10 Journal of Public Administration Research and Theory, 2018, Vol. xx, No. xx

Table 2.  OLS Models of Performance Improvement Following Performance Feedback

Dependent Variable:
Performance Improvement
Variables Following Feedback

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(1) (2)

Performance < SA 1.337** 1.301**

(0.229) (0.319)
(Performance < SA) Ｘ (Performance < HA) −0.091
(0.395)
Performance > SA −0.329** −0.242
(0.142) (0.168)
(Performance > SA) Ｘ (Performance < HA) 0.432**
(0.219)
Performance < HA 0.345**
(0.139)
Budget size 0.042 0.050*
(0.028) (0.029)
Government transfer 0.012 0.007
(0.013) (0.013)
Number of employees 0.091 0.092
(0.060) (0.060)
Payroll size 0.051 −0.166
(0.351) (0.353)
Price regulated −0.227 −0.289
(0.268) (0.264)
N 231 231
R2 0.278 0.312

Note: Robust standard errors in parentheses. All models include year fixed effect and dummy variables indicating three distinctive types of
agencies (i.e., state-owned enterprises, quasi-governmental organizations, and small institutions with less than 500 employees).
*p < .10, **p < .05.
HA, historical aspiration; SA, social aspiration.

with the performance-social aspiration gap variables.
The coefficients suggest that organizations with per-
formance below historical aspiration show a greater
degree of subsequent performance improvement, and
this improvement is largest and clearest among organi-
zations with performance above social aspiration level.
In figure  4, we show the estimates from column 2
of table 2 graphically to refocus attention on the theo-
retical claim about switching aspirations. The graph
shows the relationship between performance improve-
ment and the various indicators of the performance-
social aspiration gap and the performance-historical
aspiration gap. Specifically, the vertical axis repre-
sents the dependent variable, the level of performance
improvement, whereas the horizontal axis shows the
three subgroups of organizations depending on their
performance-social aspiration gap: organizations that
received an A (i.e., A = 1), those that received a D or
E (i.e., D = 1), and the rest. The two lines describe the
relationship between these two variables separately for
the organizations with performance above social aspi-
ration (i.e., H = 0) and those with performance below
social aspiration (i.e., H = 1).
Two things are immediately apparent from
figure 4. First, all else being constant, the level of per-
formance improvement is higher when performance
lies below social aspiration. This is evident from the
negative slopes of the two lines. Second, all else being
constant, the level of performance improvement is
higher when performance lies below historical aspi-
ration. This can be verified visually by comparing
the heights of the two lines; the line indicating per-
formance below historical aspiration lies above the
line indicating performance above historical aspira-
tion. The most important observation is, however,
that the gap between the two lines becomes greater
as organizational performance improves. Overall,
this result supports the switching aspiration hypoth-
esis. Evidence suggests that low- and high-performing
organizations generally consider different aspira-
tions; organizations performing below the average of
their social comparison group aspire to the average,
whereas organizations performing above it aspire to
improve performance relative to their own historical
positions. Overall, figure  4 resembles the theoretical
expectations that appear in figure 1.
Journal of Public Administration Research and Theory, 2018, Vol. xx, No. xx
Figure 4.  Statistical Relationship between Performance-Aspiration Gaps and Subsequent Performance Improvement. Note: This figure is
constructed directly from the coefficients in column 2 of table 2 by setting control variables at their means.
RD Approach
We now evaluate the robustness of the results in
table 2 by estimating RD models. The results of OLS
in table 2 may be biased if unobservable heterogenei-
ties exist. Further, in this simple set-up, we cannot rule
out the possibility of “regression to the mean”; if a
performance score is extreme on its first measurement,
it will tend to be closer to the average on its second
measurement. To overcome this issue, we employ an
RD design by using the fact that performance outcome
is published as one of the five grades even though the
score on a continuous scale is available.
Graphical inspection is an integral part of an RD
analysis. Before presenting the RD estimates, we first
show visually whether there is a discrete jump in the
dependent variable in each of the thresholds of the five
grades. Figure 5 shows the RD analysis visually with
a linear polynomial trend. We investigated all the four
thresholds that distinguish the five grades (see figure
5A-D). Overall, we find a clear and large jump in the
subsequent performance improvement only in one
of the four thresholds: the cutoff that distinguishes
grades C and D.9 As can be seen in figure 6, the large
jump in the dependent variable observed around the
cutoff between grades C and D is highly robust; the
coefficient remains largely unaffected when we use the
second- and third-order polynomial and the nonpara-
metric trend of the forcing variable (see figure 6A-C).10
In this study, we focused on two cutoffs (i.e., the
cutoff between grade A and those below, and the cut-
off between grades D/E and those above). This opera-
tionalization is based on the practice that grades B and
C are often called “average grades” by the regulator
and may be used as the social reference point. Overall,
9 In the case of the cutoff that distinguishes grades D and E, we had no
observations in the vicinity of the cutoff, which makes it impossible to
produce a meaningful RD estimate.
10 For the nonparametric smoothing, we used lowess command in STATA.
11
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the results in figures  5 and 6 support this operation-
alization empirically. A graphical inspection of the RD
estimates shows that there is a meaningful discontinu-
ity for only one cutoff, which distinguishes grades C
and D.
In tables 3 and 4, we present the RD estimates more
formally with all the control variables, fixed effect, and
the first-order polynomial trend of the forcing vari-
able. We estimate the impact of positive and negative
feedbacks (i.e., grades A  and D/E) separately just as
we did in the graphical investigations in figure  5. In
column 1 of tables 3 and 4, we report the RD estimates
that correspond to figure 5A and 5B, respectively. We
then add the dummy variable indicating performance
below historical aspiration [i.e., the variable H as in
equations (4) and (6)] and its interactions with indica-
tors of performance-social aspiration gaps. The results
are reported in column 2 of tables  3 and 4. Overall,
the findings suggest that an organization’s aspiration
to overcome its performance shortfalls is the primary
force of the positive impact of performance feedback
reflected in its subsequent performance improvement.
Evidence also indicates that of the two aspiration lev-
els, the one that is more relevant to the organization
depends on the level of organizational performance.
The estimates in column 2 of tables  3 and 4 provide
suggestive evidence that, when performance is below
the social aspiration level, organizations aspire to out-
perform their social comparison group. However, once
an organization’s performance exceeds the social aspi-
ration level, it aspires to improve performance relative
to its own historical positions. Overall, the RD esti-
mates corroborate the findings from the OLS model.
Discussion
The results presented here contribute to recent schol-
arly discussions regarding the effectiveness of perfor-
mance management systems. First, our findings offer
12
Figure 5.  Graphical Inspections of Discontinuities Using First-Order Polynomial Trend
empirical support for some of the hypotheses formu-
lated in Meier et  al. (2015) and Nicholson-Crotty
et  al. (2017). For instance, Nicholson-Crotty et  al.
(2017) presents a model in which high performers take
greater risks than average performers. However, rely-
ing on a single measure of performance that bundles
social and historical aspirations, they were not clear
on how a “satisficing” agent can have greater motiva-
tion for innovation although its performance exceeds
the average. In contrast, our model is fully consistent
with this behavioral assumption, yet open to the pos-
sibility that high performers may experience a greater
level of motivation. Specifically, as in figures 1 and 4,
the association between an organization’s motivation
for improvement and performance level (relative to its
peers) is U-shaped whenever its performance is below
historical aspirations.
Second, our results also shed light on the debate on
whether performance improvement of low-performing
organizations is largely due to the system’s formal
threats or sanctions placed on them. In this studied
Journal of Public Administration Research and Theory, 2018, Vol. xx, No. xx
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case, the low-performing agencies that received grades
D and E received sanctions; if a chief executive had
worked for longer than 6 months by the year-end, he
or she may be fired upon receiving either an E grade or
D grade for two consecutive years. During the studied
period, the chief executive of several agencies received
such sanctions. In figure  7B, we show that the large
performance improvement of low performers is not
driven by these agencies. In fact, agencies that received
sanctions performed worse than the rest (figure  7A).
This evidence provides support for the notion that
performance management may significantly affect per-
formance without the presence of extrinsic rewards or
accountability pressure (Kelman and Friedman 2009;
Kelman et al. 2012; Moynihan and Pandey 2010; but
see Rouse et al. 2013).
However, if the provision of sanctions has lim-
ited explanatory power, then what may explain the
negativity bias observed in the public organizational
behaviors? As Simon (1947) proposed, the bounded
rationality of public managers may be one source of
Journal of Public Administration Research and Theory, 2018, Vol. xx, No. xx 13

greater weight on negative rather than positive perfor-

mance information to attribute responsibility to pub-
lic managers and avoid blame (Hood 2010; Geys and
Sørensen 2018; Nielsen and Baekgaard 2013; Nielsen

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and Moynihan 2017; Weaver 1986). In turn, the politi-
cians’ blame avoidance may be ultimately influenced
by the psychological bias in citizens’ evaluations of
public sector performance (Boyne et al. 2009; Marvel
2015; Olsen 2015). The negativity bias inherent in
such a “chain of accountability” cascading from citi-
zens and elected officials to public managers might be
another source of the satisficing agents. Future work
may explore the relative importance of these poten-
tially competing hypotheses found in the literature.

Conclusion and Limitations

The results of our analyses suggest that providing per-
formance feedback may have a significant impact on
public organizations’ motivation for future perfor-
mance improvement. Specifically, evidence suggests that
organizational changes and improvements are indeed
driven by performance below the aspiration level even
in the public sector, and any failure to achieve a satis-
factory outcome triggers organizational changes and
learning, which in turn improve future performance.11
We also find that social aspiration level has a greater
impact on average than the historical aspiration level.
Lastly, we found support for the “switching aspiration
hypothesis.”
Taken together, the evidence provides broad support
for the existence of negativity bias in public managers’
decision making as well as the relevance of behavioral
theory in the context of governmental organizations.
Without evidence, we argue that the theoretical rela-
tionship shown in figure  1 may hold in any circum-
stance in which a relevant social comparison group
can be clearly defined. Nevertheless, we concede that
there may be other factors too that significantly influ-
ence organizations in shaping their aspiration levels.
For instance, we continue to be unaware of how our
findings would be affected by the broader institutional
environment surrounding the public organizations that
we studied. Further, this study relied on a case in which
external performance measures are enforced by the
central regulator, but the effects of performance feed-
back may differ in cases where performance is meas-
ured internally as internal politics may moderate the
effects.

Figure 6.  Robustness Checks for the Discontinuity between Grades

C and D
11 This finding is also consistent with an emerging body of evidence
in education policy showing that the accountability system (i.e.,
the satisficing assumption. An alternative explana- performance evaluation system) tends to improve the outcomes of low-
tion found in recent public administration literature performing schools and students (Dee and Jacob 2011; Hanushek and
is that political principals (i.e., elected officials) place Raymond 2005; Ladd and Lauen 2010; Rockoff and Turner 2010).
14 Journal of Public Administration Research and Theory, 2018, Vol. xx, No. xx

Table 3.  RD Models of Performance Improvement: Low Performance Feedback

Dependent Variable:
Performance Improvement
Variables Following Feedback

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(1) (2)

Performance < SA 0.698** 0.789**

(0.316) (0.383)
(Performance < SA) Ｘ (Performance < HA) −0.107
(0.420)
Performance < HA 0.284**
(0.122)
Budget size 0.042 0.044
(0.027) (0.027)
Government transfer 0.012 0.009
(0.013) (0.013)
Number of employees 0.110* 0.104*
(0.059) (0.059)
Payroll size 0.079 −0.078
(0.335) (0.344)
Price regulated −0.145 −0.143
(0.271) (0.263)
N 231 231
R2 0.325 0.341

Note: Robust standard errors in parentheses. All models include a linear trend of the forcing variable, year fixed effect, and dummy variables
indicating three distinctive types of agencies (i.e., state-owned enterprises, quasi-governmental organizations, and small institutions with less
than 500 employees).
*p < .10, **p < .05.
HA, historical aspiration; SA, social aspiration.

Table 4.  RD Models of Performance Improvement: High Performance Feedback

Dependent Variable:
Performance Improvement
Variables Following Feedback

(1) (2)

Performance > SA 0.244 0.329

(0.262) (0.245)
(Performance > SA) Ｘ (Performance < HA) 0.577**
(0.211)
Performance < HA 0.249*
(0.133)
Budget size 0.042 0.049*
(0.026) (0.027)
Government transfer 0.009 0.005
(0.013) (0.013)
Number of employees 0.119* 0.121**
(0.061) (0.061)
Payroll size 0.061 −0.104
(0.333) (0.342)
Price regulated −0.178 −0.241
(0.260) (0.264)
N 231 231
R2 0.317 0.342

Note: Robust standard errors in parentheses. All models include a linear trend of the forcing variable, year fixed effect, and dummy variables
indicating three distinctive types of agencies (i.e., state-owned enterprises, quasi-governmental organizations, and small institutions with less
than 500 employees).
*p < .10, **p < .05.
HA, historical aspiration; SA, social aspiration.
Journal of Public Administration Research and Theory, 2018, Vol. xx, No. xx
Figure  7.  Performance Improvement of Low-Performing Organizations: Sanctioned Versus Not Sanctioned. Note: In figure  7B, the
organizations on which a certain form of formal sanctions were imposed are depicted in the shape of diamonds.
Before we conclude, we note three issues regard-
ing our empirical analyses. First, we concede that the
studied agencies vary in terms of size, affiliated indus-
try, core public functions, and so on. Moreover, our
results are based on the analyses of a relatively short
2-year panel data. Although we addressed this issue by
including key control variables, it is possible that the
proposed model might suffer from omitted variable
bias. However, we believe that this bias would not be
significant due to the unique quasi-experimental set-
ting of our empirical strategy. That is, although these
agencies are different, they all have equal chances to be
located either just above or just below the threshold; in
other words, whether an agency is located just above
or just below (i.e., the treatment) is almost randomly
assigned. We argue that such a randomized assign-
ment of the treatment may significantly reduce the
possibility of bias. Second, we need to reiterate that
this study explored the short-run impacts of perfor-
mance feedback. One may question whether a year is
long enough for public organizations to respond to the
feedback. However, given that previous studies in edu-
cation accountability systems investigate the impact of
performance feedbacks by allowing only 4–6 months
for school administrators to respond, and yet find sig-
nificant impacts (e.g., Rockoff and Turner 2010), we
believe that organizations can produce meaningful
changes over the course of a year. Third, we abstain
from making a normative judgment on whether the
improvement in performance grades is necessarily a
socially desirable outcome. Prior research has shown
evidence of “performance paradox,” whereby per-
formance management systems produce unintended
consequences at the expense of improved short-term
outcomes (Dias and Maynard-Moody 2007; Hong
2016). This study could not verify whether the studied
15
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system creates such perverse incentive structures. We
add the caveat, therefore, that performance grades may
be influenced, at least to some extent, by factors other
than organizational learning and innovation, such as
goal displacement or impression management (e.g.,
Bohte and Meier 2000; Wayne and Liden 1995).
Nevertheless, we continue to believe that future
work may further advance our understanding on
performance management by addressing the above-
mentioned issues. Specifically, empirical evidence of
long-run impacts of performance management system
(based on long panel data set) is rare. Scholars may
also fill this gap in the literature by studying the mid- or
long-term dynamics of the relationship among public
managers, elected officials, and voters. In this regard,
our study’s findings will be of greater use if supported
by future works that could provide deeper insights into
the ways in which public organizations behave.
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