The Impact of Incentives on Effort: Teacher Bonuses in North Carolina. Program on Education Policy and Governance Working Papers Series. PEPG 10-06

Teacher effort, a critical component of education production, has been largely ignored in the literature due to measurement difficulties. Using a principal-agent model, North Carolina public school data, and the state's unique accountability system that rewards teachers for school-level academic growth, we show that we can distill effort from teacher absence data and capture its effect on student achievement in a structural framework. We find that: (1) Incentives lead teachers to try harder. The bonus program reduced the number of sick days taken by about 0.6 days for an average teacher; (2) When teachers try harder, students do better. Increased effort of teachers translates into improved student performance. Estimates show that standardized reading scores increased by about 1.3% of a standard deviation and standardized math scores by about 0.9% of a standard deviation; and (3) Group-level incentives can actually be more powerful than individual-level incentives. Policy simulations from the model estimates show that an individual bonus program would actually produce weaker incentive effects. While free-rider effects are eliminated, individual incentives push a majority of teachers into one of two categories: those who would qualify for the bonus even without trying and others would not qualify no matter how hard they worked. A bibliography is included. (Contains 3 figures and 10 footnotes.)