Effects of individual incentive reforms in the public sector: the case of teachers

Can incentive schemes deliver value in the public sector, despite major principal-agent challenges? We evaluate a reform that introduced individual teacher performance-related pay and tournaments in public schools in Portugal, despite trade union opposition. We find evidence that the focus on individual performance decreased student achievement (as measured by national exams) and increased grade inflation. The results follow from a difference-in-differences analysis of matched student-school panels and two complementary control groups (including private schools). Students with a higher proportion of teachers exposed to tournaments also perform worse. Overall, our results highlight the social costs of disrupting workers’ cooperation, a possible unintended consequence of public-sector tournaments.