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When Incentives Matter Too Much: Explaining Significant Responses to Irrelevant Information

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  • Tom Ahn
  • Jacob L. Vigdor

Abstract

When agents observe a continuous variable and a discrete signal based on that variable, theory suggests that the signal should not impact behavior conditional on the variable. Numerous empirical studies, many based on regression discontinuity design, contradict this basic prediction. We propose two rationalizations with testable implications. One is based on information acquisition costs and the other on learning and imperfect information. Using education data from North Carolina and exploiting a pay-for-performance system, we find support for the model of learning. This implies that rational responses to policy interventions may emerge gradually, and evaluations with short-term data may understate treatment effects.

Suggested Citation

  • Tom Ahn & Jacob L. Vigdor, 2021. "When Incentives Matter Too Much: Explaining Significant Responses to Irrelevant Information," Journal of Human Capital, University of Chicago Press, vol. 15(4), pages 629-664.
    • Handle: RePEc:ucp:jhucap:doi:10.1086/716785
    DOI: 10.1086/716785
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    Cited by:

    1. Tom Ahn, 2017. "Strategic Matching of Teachers and Schools with (and without) Accountability Pressure," Education Finance and Policy, MIT Press, vol. 12(4), pages 516-535, Fall.
    2. Figlio, D. & Karbownik, K. & Salvanes, K.G., 2016. "Education Research and Administrative Data," Handbook of the Economics of Education,, Elsevier.
    3. Brehm, Margaret & Imberman, Scott A. & Lovenheim, Michael F., 2017. "Achievement effects of individual performance incentives in a teacher merit pay tournament," Labour Economics, Elsevier, vol. 44(C), pages 133-150.
    4. Julie Berry Cullen & Cory Koedel & Eric Parsons, 2021. "The Compositional Effect of Rigorous Teacher Evaluation on Workforce Quality," Education Finance and Policy, MIT Press, vol. 16(1), pages 7-41, Winter.

    More about this item

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • I2 - Health, Education, and Welfare - - Education
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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