Inducing Positive Sorting through Performance Pay: Experimental Evidence from Pakistani Schools

This study uses teachers’ contract choices and a randomised controlled trial of performance pay with 7,000 teachers across 243 private schools in Pakistan to study whether performance pay can attract and retain higher-quality teachers.

Attracting and retaining high-quality teachers has a large social benefit, but it is challenging for schools to identify good teachers ex-ante. This study uses teachers’ contract choices and a randomised controlled trial of performance pay with 7,000 teachers across 243 private schools in Pakistan to study whether performance pay can attract and retain higher-quality teachers. 

Consistent with adverse selection models, we find that performance pay can induce positive sorting: both high value-added teachers and teachers who respond more strongly to incentives significantly prefer performance pay and sort into these schools. Using two additional treatments, this study shows that effects are more pronounced among teachers with more information about their quality and teachers with lower switching costs.

If we take into account these sorting effects, the total effect of performance pay on test scores is twice as large as if we just measured the direct effects on the existing stock of teachers, suggesting we may have significantly underestimated the benefits.