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Paying for Performance: The Effect of Teachers' Financial Incentives on Students' Scholastic Outcomes

  • Lavy, Victor

Performance-related pay for teachers is being introduced in many countries, but there is little evaluation to date on the effects of such programmes. This Paper evaluates a particular incentive experiment. The incentive program is a rank-order tournament among teachers of English, Hebrew, and mathematics. Teachers were rewarded with cash bonuses for improvements in their students’ performance on high-school matriculation exams. Since the schools in the programme were not selected at random, the evaluation is based on comparison groups. Three alternative identification strategies are used to estimate the causal effect of the programme: a natural experiment stemming from measurement error in the assignment variable, a regression discontinuity method, and propensity score matching. The results of all three methods tell a consistent story: teachers’ monetary performance incentives have a significant effect on students’ achievements in English and math. No spillover effect on untreated subjects is evident and the general equilibrium impact of the programme is positive as well. The programme is also more cost-effective than alternative forms of intervention such as extra instruction time and is as effective as cash bonuses for students.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3862.

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Date of creation: Apr 2003
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Handle: RePEc:cpr:ceprdp:3862
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  1. Jensen, M.C. & Murphy, K.J., 1988. "Performance Pay And Top Management Incentives," Papers 88-04, Rochester, Business - Managerial Economics Research Center.
  2. Richards, Craig E. & Sheu, Tian Ming, 1992. "The South Carolina school incentive reward program: A policy analysis," Economics of Education Review, Elsevier, vol. 11(1), pages 71-86, March.
  3. Victor Lavy, 2002. "Evaluating the Effect of Teachers' Group Performance Incentives on Pupil Achievement," Journal of Political Economy, University of Chicago Press, vol. 110(6), pages 1286-1317, December.
  4. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
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  6. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-64, October.
  7. Hanushek, Eric A., 2002. "Publicly provided education," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 30, pages 2045-2141 Elsevier.
  8. Heckman, James J & Ichimura, Hidehiko & Todd, Petra E, 1997. "Matching as an Econometric Evaluation Estimator: Evidence from Evaluating a Job Training Programme," Review of Economic Studies, Wiley Blackwell, vol. 64(4), pages 605-54, October.
  9. Carneiro, Pedro & Heckman, James J., 2003. "Human Capital Policy," IZA Discussion Papers 821, Institute for the Study of Labor (IZA).
  10. Moulton, Brent R., 1986. "Random group effects and the precision of regression estimates," Journal of Econometrics, Elsevier, vol. 32(3), pages 385-397, August.
  11. Heckman, James J & Ichimura, Hidehiko & Todd, Petra, 1998. "Matching as an Econometric Evaluation Estimator," Review of Economic Studies, Wiley Blackwell, vol. 65(2), pages 261-94, April.
  12. Joshua D. Angrist & Victor Lavy, 1999. "Using Maimonides' Rule To Estimate The Effect Of Class Size On Scholastic Achievement," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 533-575, May.
  13. Robert Gibbons, 1998. "Incentives in Organizations," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 115-132, Fall.
  14. Kandel, Eugene & Lazear, Edward P, 1992. "Peer Pressure and Partnerships," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 801-17, August.
  15. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
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