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Reducing Teacher Moral Hazard in the U.S. Elementary and Secondary Educational System through Merit-pay: An Application of the Principal--Agency Theory

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  • Michael Casson

Abstract

America’s elementary and secondary educational system is faced with an inefficiency stemming from a basic problem associated with unobservability: moral hazard. In this case, the teacher (agent) has an incentive to exert less effort (given cost associated with more work) if the school district (principal) cannot distinguish between low student performance due to a lack of teacher effort and low student performance due low student quality (random variable). This research develops an optimal incentive scheme that guarantees the teacher a fixed payment, plus a variable payment that would be a function of teacher ‘action’ variables thereby reducing moral hazard.

Suggested Citation

  • Michael Casson, 2007. "Reducing Teacher Moral Hazard in the U.S. Elementary and Secondary Educational System through Merit-pay: An Application of the Principal--Agency Theory," Forum for Social Economics, Taylor & Francis Journals, vol. 36(2), pages 87-95, January.
    • Handle: RePEc:taf:fosoec:v:36:y:2007:i:2:p:87-95
    DOI: 10.1007/s12143-007-9004-3
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    References listed on IDEAS

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    1. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, April.
    2. Ross, Stephen A, 1973. "The Economic Theory of Agency: The Principal's Problem," American Economic Review, American Economic Association, vol. 63(2), pages 134-139, May.
    3. Dale Ballou, 1996. "Do Public Schools Hire the Best Applicants?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 111(1), pages 97-133.
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    Cited by:

    1. Rosemary Walker & Liviu Florea, 2014. "Easy-Come-Easy-Go: Moral Hazard in the Context of Return to Education," Journal of Business Ethics, Springer, vol. 120(2), pages 201-217, March.

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