This paper examines the potential output gains from the implementation of optimal teacher incentive pay schemes, by calibrating the Holmstrom and Milgrom (1987) hidden action model using data from Muralidharan and Sundararaman (2011), a teacher incentive pay experiment implemented in Andhra...

Empirically, compensation systems generate substantial effort despite weak monetary incentives. We consider reciprocal motivations as a source of incentives. We solve for the optimal contract in the basic principal-agent problem and show that reciprocal motivations and explicit performance-based...