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Paying for Performance to Improve K-12 Student Achievement

Introduction and Executive Summary

This report examines the potential for using performance incentives to improve the K-12 classroom education experience. It uses principles derived from economic theory to identify what type of incentives might work and what form those incentives should take. The limited literature on performance incentive applications in K-12 education is then examined to see if the evidence is consistent with the economic prescriptions.

This review reaches the following conclusions:

  • Teacher-based performance incentives make the most sense conceptually, and appear to perform the best empirically. This confirms the theoretical notion that the classroom, as a production unit, faces weak, and sometimes perverse, incentives to perform optimally.
  • School- and school-management based incentives appear to be ineffective, or less cost effective than teacher-based incentive schemes. The exception appears to be in the case where introducing profit-motivated management is an option.
  • Student-based incentives appear to stimulate better test performance selectively. Because young people heavily discount the future, however, compensation needs to be immediate, making it more difficult to stimulate long-term performance. It also is unclear whether teachers will respond to greater student effort with increases or decreases in their own effort.
  • Parent-based incentives likely are effective in stimulating reduced truancy and more parental involvement, at least in low-income households. Since parental oversight and effort improves school performance generally, stimulating that oversight with financial incentives likely will improve student performance and, perhaps, provide some stimulus to teacher effort.

In almost all of the studies reviewed, institutional and labor policy barriers limit the ability to implement and demonstrate the potential of incentive-based systems. Proponents of the status quo resist with great vigor attempts to make schools and staff accountable or to amplify market-competitive forces. Incentive programs will function more effectively if communities confront this issue, and reduce such barriers.


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About the authors: Randall Pozdena received his AB in Economics (magna cum laude, Phi Beta Kappa) from Dartmouth College and his Ph.D. from the University of California, Berkeley. He is president of QuantEcon, Inc., an Oregon-based economics and finance consultancy. He does research and writing in numerous fields, including financial markets, education, health care, real estate, forest products and transportation. He also offers expert witness testimony in litigation.

Prior to relocating to the Pacific Northwest, Pozdena was research Vice President of the Federal Reserve Bank of San Francisco. He has written over 50 published papers and books. He taught economics and finance at the Graduate School of Business, University of California, Berkeley and Graduate School of Administration, University of California, Irvine.

Pozdena has served on numerous gubernatorial, charitable and corporate boards and committees, including the Governor’s Quality Education Commission, the Governor’s PERS Reform Task Force, and the Governor’s Council of Economic Advisors. He was chair of the Oregon Investment Council and has served on the investment committees of universities, community foundations and health systems.

About Cascade Policy Institute: Founded in 1991, Cascade Policy Institute is Oregon’s premier policy research center. Cascade’s mission is to explore and promote public policy alternatives that foster individual liberty, personal responsibility and economic opportunity. To that end, the Institute publishes policy studies, provides public speakers, organizes community forums and sponsors educational programs.

Cascade Policy Institute is a tax-exempt educational organization as defined under IRS code 501(c)(3). Cascade neither solicits nor accepts government funding and is supported by individual, foundation and business contributions. Nothing appearing in this document is to be construed as necessarily representing the views of Cascade or its donors, or as an attempt to aid or hinder the passage of any bill before any legislative body. The views expressed herein are the author’s own. Copyright 2008 by Cascade Policy Institute. All rights reserved.

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