Risk Aversion and Support for Merit Pay: Theory and Evidence from Minnesota's Q Comp Program. Working Paper #09-05

Recent research attributes the lack of merit pay in teaching to the resistance of teachers. This paper examines whether the structure of merit pay affects the types of teachers who support it. We develop a model of the relative utility teachers receive from merit pay versus the current fixed schedule of raises. We show that if teachers are risk averse, teachers with higher base salaries would be more likely to support a merit pay program that allows them to keep their current base salary and risk only future salary increases. We test the predictions of the model using data from a new merit pay program, the Minnesota "Q Comp" program, which requires the approval of the teachers in each school district. Consistent with the model's predictions, we find that districts with higher base salaries and a higher proportion of teachers with masters degrees are more likely to approve merit pay. A Data Appendix is included.