Abstract
The paper summarizes principal–agent (P-A) theory and applies it to the teaching profession, arguing that it provides a strong framework for analysing institutional arrangements governing the work of teachers. P-A theory proposes factors that determine whether or not paying teachers in relation to measures of performance improves teacher productivity. Teachers' work is characterized by moral hazard, risk aversion, multiple principals and multiple objectives, which make the design of an optimal performance pay system complex, especially as it needs to be context specific. A crucial factor is the extent to which teacher motivation is altruistic or opportunistic. International evidence on teacher rewards systems and their relation to teacher performance is summarized. In many developing countries, such as India, teacher contracts fail to provide sanctions for poor performance or rewards for effective teaching. In such contexts, improved incentives for teacher performance are an essential component of reforms to raise the quality of education.
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