Professor Jaag says that micromanagement and low pay is better than merit pay for measurable results.
Hidden Teacher Effort in Educational Production:
Monitoring vs. Merit Pay
February 25, 2005
This paper deals with the optimality of teacher incentive contracts in the presence of costly
or limited government resources. It considers educational production under asymmetric in-
formation as a function of teacher effort and class size. In the presence of costly government
resources and convex effort costs, teacher monitoring – which is wasteful in principle – may be
superior to merit pay in order to induce second-best teacher effort; optimum class size is not af-
fected by informational deﬁciencies. If the government budget is exogenously ﬁxed, optimum
teacher effort may not be affordable, which is shown to make the case for monitoring activity
instead of incentive pay even stronger.
Keywords: Education, Moral Hazard, Monitoring,Merit Pay
JEL-Classiﬁcation: I21, I28, D82