Recently, the government reform efforts in Taiwan are focusing on performance management. There are two reasons for promoting government performance management. One is the international trend of New Public Management reform of which come out from the scarcity of government's resources. The other reason is democratization. Democratic accountability is established through party competition. Promoting performance management is one way to show ruling party's response to the pressure of democratic accountability. However, behind all these reform efforts, there is still a need for a solid theoretical perspective to access the effectiveness of applying performance management schemes in government. In this article, authors utilize rational choice institutionalism and the decision model based on "bounded rationality" to inspect these efforts. Under the concept of bounded rationality, organization can be seen as a nexus of incomplete contracts. First, authors use this perspective to explain the existence of "informal" institutions in exercising performance appraisal in government organizations. Then, authors discuss the managerial problems concerning implementing performance management in hierarchy, such as information asymmetry, authority monopoly and the externality of team production. Lastly, authors use the "incentive compensation model" from the economics of organization to discuss four principles about institutional design in performance management. Then these principles are used to evaluate the current reform efforts and suggestions are made to promote further discussions concerning how to consolidate these reform efforts in the future.Keywords: Government Performance Management, Performance Appraisal, Economics of Organization, Rational Choice Institutionalism, Bounded Rationality, Incomplete Contract, Incentive Compensation