Subjective versus Objective Incentives and Teacher Productivity

A central challenge facing firms is how to incentivize employees. While objective, output-based incentives may be theoretically ideal, in practice they may lead employees to reduce effort on non-incentivized outcomes and may fail in settings where effort is weakly tied to output. We study the effect of subjective incentives (manager performance evaluation) and objective incentives (test score-based) relative to no incentives for teachers using an RCT in 230 Pakistani schools. First, we show that subjective and objective incentives both increase test scores and have similar magnitude effects. However, objective incentives decrease non-test score student outcomes relative to subjective incentives. Second, we show that teachers’ effort response is very different under each scheme, with attendance increasing under subjective and teaching quality decreasing under objective. Finally, we rationalize these effects through the lens of a moral hazard model with multi-tasking. We use within-treatment variation to isolate the causal effect of contract noise and distortion and show that these channels explain most of our reduced form effects.