Abstract
America’s elementary and secondary educational system is faced with an inefficiency stemming from a basic problem associated with unobservability: moral hazard. In this case, the teacher (agent) has an incentive to exert less effort (given cost associated with more work) if the school district (principal) cannot distinguish between low student performance due to a lack of teacher effort and low student performance due low student quality (random variable). This research develops an optimal incentive scheme that guarantees the teacher a fixed payment, plus a variable payment that would be a function of teacher ‘action’ variables thereby reducing moral hazard.
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Notes
In the case of full information, the school districts can observe all relevant variables thereby enabling them to impose any level they want consistent with the teacher’s participation (by threatening a large penalty if teachers do not conform). Thus, the only relevant constraint is the participation constraint.
The percentage of student performance attributed to teacher effort is debatable. However, this model begins at any agreed upon percentage.
Monetary compensation as a result of an increased number of students passing may occur in contract renegotiations and in competitive educational systems.
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Casson, M.H. Reducing Teacher Moral Hazard in the U.S. Elementary and Secondary Educational System through Merit-pay: An Application of the Principal–Agency Theory. For Soc Econ 36, 87–95 (2007). https://doi.org/10.1007/s12143-007-9004-3
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DOI: https://doi.org/10.1007/s12143-007-9004-3