When privatization is not feasible orpalatable, developing country governments seeking to improvethe performance of state enterprises are often negotiatingperformance contracts with their managers. Many of thesecontracts have been put in place with World Bank assistance.Research shows that they rarely work. The author summarizesthe rationale for performance contracts and the evidenceagainst them and explores the reasons why they haven'tworked. She concludes that since a well-designed andcarefully enforced performance contract can be aspolitically costly as a well-designed privatization,performance contracts are not likely to be successful incountries that lack the political will to privatize.