Jordan Weissmann of The Atlantic explains: Link
Thanks to education reformers such as former D.C. schools chancellor Michelle Rhee, many of us are now familiar with the idea of merit pay -- the notion that teachers' earnings should be tied to their students' success. Unions have pushed back hard against the idea. In terms of public policy, it often translates into handing out year-end bonuses to instructors who get the best results, with the hope that the promise of a larger paycheck will motivate them to work harder when they're up in front of the chalkboard.
But Levitt, Fryer and Co. argue that there's a serious problem with merit pay. So far, they say, there's been scant evidence that it actually works. Studies of teacher incentive programs in Tennessee and New York City failed to find any signs that they improved student learning. In the New York experiment, which Harvard's Fryer conducted, the impact may have even been detrimental.
Enter loss aversion. The authors theorized that instead of offering a lump-sum bonus to teachers come summertime, it might be more effective to give instructors money upfront, then warn them that they would have to pay it back if their students didn't hit the proper benchmarks. Rather than tap into teachers' ambition, they'd tap into their anxiety.
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Can we boost a teacher's academic performance by giving him or her more money? Efforts to reward teacher's performance with year-end bonuses have largely failed, but a new study by economists revealed that you can indeed motivate teachers to perform better: you just have to give them money up front, and threaten to take it away if they fail.