We study the use of performance measurement systems in the public sector. We hypothe-size that the way in which these systems are being used affects organizational performance,and that these performance effects depend on contractibility. Contractibility encompassesclarity of goals, the ability to select undistorted performance metrics, and the degree towhich managers know and control the transformation process. We expect that public sec-tor organizations that use their performance measurement systems in ways that matchthe characteristics of their activities outperform those that fail to achieve such fit. We testour hypotheses using survey data from 101 public sector organizations. Our findings indi-cate that contractibility moderates the relationship between the incentive-oriented useof the performance measurement system and performance. Using the performance mea-surement system for incentive purposes negatively influences organizational performance,but this effect is less severe when contractibility is high. We also find that an exploratoryuse of the performance measurement system tends to enhance performance; this positiveeffect is independent of the level of contractibility. The effectiveness of the introductionof performance measurement systems in public sector organizations thus depends bothon contractibility and on how the system is being used by managers. These findings haveimportant implications, both for practice and for public policy.