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

Performance-related pay for teachers is being introduced in many countries, but there is little evaluation to date on the effects of such programs. 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 program 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 program: 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 program is positive as well. The program is also more cost-effective than alternative forms of intervention such as extra instruction time and is as effective as cash bonuses for students