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Pay for percentile

  • Gadi Barlevy
  • Derek Neal

We propose an incentive pay scheme for educators that links educator compensation to the ranks of their students within appropriately defined comparison sets, and we show that under certain conditions our scheme induces teachers to allocate socially optimal levels of effort to all students. Because this scheme employs only ordinal information, our scheme allows education authorities to employ completely new assessments at each testing date without ever having to equate various assessment forms. This approach removes incentives for teachers to teach to a particular assessment form and eliminates opportunities to influence reward pay by corrupting the equating process or the scales used to report assessment results. Our system links compensation to the outcomes of properly seeded contests rather than cardinal measures of achievement growth. Thus, education authorities can employ our incentive scheme for educators while employing a separate system for measuring growth in student achievement that involves no stakes for educators. This approach does not create direct incentives for educators to take actions that contaminate the measurement of student progress.

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Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-09-09.

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Date of creation: 2009
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Handle: RePEc:fip:fedhwp:wp-09-09
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  1. Scott E. Carrell & James E. West, 2008. "Does Professor Quality Matter? Evidence from Random Assignment of Students to Professors," NBER Working Papers 14081, National Bureau of Economic Research, Inc.
  2. Paul Glewwe & Nauman Ilias & Michael Kremer, 2010. "Teacher Incentives," American Economic Journal: Applied Economics, American Economic Association, vol. 2(3), pages 205-27, July.
  3. Derek Neal, 2010. "Aiming for Efficiency Rather Than Proficiency," Journal of Economic Perspectives, American Economic Association, vol. 24(3), pages 119-32, Summer.
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  6. Green, Jerry R & Stokey, Nancy L, 1983. "A Comparison of Tournaments and Contracts," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 349-64, June.
  7. Victor Lavy, 2004. "Performance Pay and Teachers' Effort, Productivity and Grading Ethics," NBER Working Papers 10622, National Bureau of Economic Research, Inc.
  8. Edward P. Lazear, 2001. "Educational Production," The Quarterly Journal of Economics, MIT Press, vol. 116(3), pages 777-803, August.
  9. John Cawley & James Heckman & Edward Vytlacil, 1999. "On Policies To Reward The Value Added By Educators," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 720-727, November.
  10. Jacob, Brian A., 2005. "Accountability, incentives and behavior: the impact of high-stakes testing in the Chicago Public Schools," Journal of Public Economics, Elsevier, vol. 89(5-6), pages 761-796, June.
  11. Edward P. Lazear & Sherwin Rosen, 1979. "Rank-Order Tournaments as Optimum Labor Contracts," NBER Working Papers 0401, National Bureau of Economic Research, Inc.
  12. Malcomson, James M, 1984. "Work Incentives, Hierarchy, and Internal Labor Markets," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 486-507, June.
  13. Baker, George P, 1992. "Incentive Contracts and Performance Measurement," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 598-614, June.
  14. Ladd, Helen F., 1999. "The Dallas school accountability and incentive program: an evaluation of its impacts on student outcomes," Economics of Education Review, Elsevier, vol. 18(1), pages 1-16, February.
  15. Dale Ballou, 2009. "Test Scaling and Value-Added Measurement," Education Finance and Policy, MIT Press, vol. 4(4), pages 351-383, October.
  16. 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.
  17. H. Vogt, 1983. "Unimodality of differences," Metrika, Springer, vol. 30(1), pages 165-170, December.
  18. Daniel M. Koretz, 2002. "Limitations in the Use of Achievement Tests as Measures of Educators' Productivity," Journal of Human Resources, University of Wisconsin Press, vol. 37(4), pages 752-777.
  19. O'Keeffe, Mary & Viscusi, W Kip & Zeckhauser, Richard J, 1984. "Economic Contests: Comparative Reward Schemes," Journal of Labor Economics, University of Chicago Press, vol. 2(1), pages 27-56, January.
  20. Carmichael, H Lorne, 1983. "The Agent-Agents Problem: Payment by Relative Output," Journal of Labor Economics, University of Chicago Press, vol. 1(1), pages 50-65, January.
  21. 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.
  22. Bhattacharya, Sudipto & Guasch, J Luis, 1988. "Heterogeneity, Tournaments, and Hierarchies," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 867-81, August.
  23. Adele Atkinson & Simon Burgess & Bronwyn Croxson & Paul Gregg, 2004. "Evaluating the Impact of Performance-related Pay for Teachers in England," The Centre for Market and Public Organisation 04/113, Department of Economics, University of Bristol, UK.
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