Measuring Quality for Use in Incentive Schemes: The Case of 'Shrinkage' Estimators
70 Pages Posted: 27 Sep 2018
Date Written: August 02, 2018
Researchers commonly “shrink” raw quality measures based on statistical criteria. This paper studies when and how this transformation’s statistical properties would confer economic benefits to a utility-maximizing decisionmaker across common asymmetric information environments. I develop the results for an application measuring teacher quality. The presence of a systematic relationship between teacher quality and class size could cause the data transformation to do either worse or better than the untransformed data. I use data from Los Angeles to confirm the presence of such a relationship and show that the simpler raw measure would outperform the one most commonly used in teacher incentive schemes.
Keywords: economics of education, empirical contracts, teacher incentive schemes, teacher quality
JEL Classification: J010, I210, I280, D810
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