Using Performance Incentives to Reward the Value Added by Educators: Theory and Evidence from China

Over the last thirty years, education reform has been a active topic of debate among policy makers and social scientists. The majority of proposals for reform have been based on a combination of regulations and fixed definitions of school - the resources, organization and structure of schools and classrooms. However, recently increased attention has been directed to the results of the school. Reform proposals have suggested policies that are built on what students actually accomplish and reward instructors who induce good performance by students. In this paper we demonstrate that incentive contracts based on a combination of objective and subjective performance evaluations can mitigate incentive distortions caused by imperfect objective measures. Moreover, when we combine the explicit contract based on an objective performance measure with the implicit contract based on a subjective performance measure, the combined incentive provided (supported by trigger strategy) are increasing with the variation of the objective performance measure. We then test the performance of our model using data from China. In China, administrators evaluate the performance of teachers and this evaluation is used to determine a component of teacher compensation. Our estimates indicate that teacher salaries are indeed positively related to objective performance and subjective performance measures. We find that increases in salary are greater for higher ranked instructors. Finally, we find that although education and sex do not affect salary they are significantly related to the probability of promotion. Instructors who are more educated, married, male, experienced and who encounter fewer students within a week are more likely to be higher ranked.