Welcome to the Profit of Education website. Continuing the conversation begun in the book Profit of Education, we discuss the latest economic evidence on education reform.

Merit pay and free riders

If a teacher’s pay depends in some part on educational outcomes, i.e. you’re to have an element of “merit pay,” does it matter whether each teacher’s bonus depends only on the outcomes for her own students or whether teachers in a school share a bonus based on school-wide objectives? The argument against sharing is the “free-rider” problem. If my bonus depends mainly on what others do, I have little incentive to be more productive. The argument for sharing is the “team work” argument. Sharing a bonus gives everyone an incentive to work together, and to keep an eye out that others are pulling their weight.

Sarena Goodman and Lesley Turner take a look at this issue in light of the New York City teacher bonus experiment. In this big dollar experiment, pretty much all schools decided to share bonus money. Overall, the availability of bonuses seems to have produced no educational improvements. Goodman and Turner broke down the data to see what could be learned about the free rider problem. The authors compared what happened in schools where just a few teachers were responsible for most of the students being tested (little free riding) to what happened in schools where many teachers contributed to measured outcomes (more free riding). The idea is that the free rider problem should be smaller in the former. Indeed, the authors find that where the free rider problem was smallest, there were measurable improvements in student math performance. But the improvements were still pretty small. So we do see support for the idea that “free riding” is a problem. But that’s not the same as saying that minimizing the free rider problem makes incentive pay work well.

Goodman and Turner offer a nice statement of some of the difficulties in thinking about designing teacher pay systems.

Even so, many challenges in designing effective teacher incentive schemes remain. Incentive pay programs that come about as a compromise between school districts and teachers unions’ might contain incentives that are so diluted they are destined to fail. Finally, the most important margin through which teacher pay can improve student achievement may be the extensive margin, or the decision to enter the teaching profession. Small-scale teacher incentive pay experiments cannot provide information concerning the general equilibrium effects of overall increase in teacher pay or movement toward performance-based compensation.

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