The Missing Link: Estimating the Impact of Incentives on Effort and Effort on Production Using Teacher Accountability Legislation∗

Teacher effort, a critical component of education production, has been ignored in the literature due to measurement difficulties. I use a principal-agent model, data on NC public elementary schools, and the state’s unique accountability system that rewards teachers for year-over-year school-level academic growth, to distill effort from absence data and capture its effect on student achievement. I find low effort at low and high probabilities of bonus receipt, high effort when the bonus outcome is in doubt, and free-ridership. Teachers respond optimally to incentives, effort strongly impacts achievement, and the effect varies across racial groups. Policy changes that 1) restrict the bonus criterion to classroom-level to solve the free-rider problem, 2) track minority scores to close the racial achievement gap, and 3) strengthen the bonus criterion to induce effort, all back-fire due to the non-linear effect of marginal teacher effort on achievement, resulting in lower statewide scores.