Setting Targets for Results Based Financing Programs: A Simple Cost Benefit Framework

Development programs that use financial incentives to motivate better performance are increasingly used by governments, multilaterals and private donors as alternatives to traditional input-based financing. One class of results-based financing programs uses pre-defined outcomes, or targets, to measure and reward performance. If established targets are met, then the implementing agency receives a financial bonus. In this paper, we propose a simple cost-benefit framework for setting targets. The basic premise of the model is that targets should be set such that total expected benefits outweigh the cost of the program. We develop the model in the context of the health sector and discuss its application to a health results-based financing initiative in the Mesoamerican region.