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Hidden Teacher Effort in Educational Production: Monitoring vs. Merit Pay

  • Christian Jaag

    (University of St. Gallen Institute of Public Finance & Fiscal Law)

This paper deals with the optimality of teacher incentive contracts in the presence of costly or limited government resources. It considers educational production under asymmetric information as a function of teacher effort and class size. In the presence of costly government resources and convex effort costs, teacher monitoring - which is wasteful in principle - may be superior to merit pay in order to induce second-best teacher effort; optimum class size is not affected by informational deficiencies. If the government budget is exogenously fixed, optimum teacher effort may not be affordable, which is shown to make the case for monitoring activity instead of incentive pay even stronger.

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Paper provided by EconWPA in its series HEW with number 0503003.

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Length: 24 pages
Date of creation: 18 Mar 2005
Date of revision:
Handle: RePEc:wpa:wuwphe:0503003
Note: Type of Document - pdf; pages: 24
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  20. James Heckman & Carolyn Heinrich & Jeffrey Smith, 2002. "The Performance of Performance Standards," NBER Working Papers 9002, National Bureau of Economic Research, Inc.
  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.
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