School Consolidations and Teacher Incentive Contracts

Abstract

We construct an agency-based model of incentive contracting within the education system. We use this framework to evaluate first-best, second-best, and pooling contracts under a variety of assumptions germane to the consolidation of elementary and secondary schools. By introducing a monitoring technology, an auditor, which serves as liaison between the principal (superintendent) and the agent (teacher), information constraints induced by school consolidations can be alleviated. Using this framework, we consider various policy issues such as how and where teacher incentive contracts might succeed, what may cause incentive contracts to fail, and how to determine optimal school size.