1. Kai Xu 404614994
Econ 111
Olivia Brichall
05/18/2016
Policy Evaluation: Teacher Performance Pay Program in India
Country Outline
The Republic of India is the largest country in south Asian subcontinent and the seventh-
largest country in the world by area. It is the second-most-populous country follows China
in the world with more than 1.2 billion people. With such huge national territories and
population size, India has played a significant role across nations. GDP of India in 2014
was approximately 2049 billion U.S. dollars with nearly 7 percent annual GDP growth rate
after the market-based reform in 1991, which makes it one of the fastest-growing
economies and the third-largest country by purchasing power parity in the current world.
(World Bank, India Data) The high rate of Industrialization and urbanization is one of the
main reasons for the growth. Information technology industry’s contribution to GPD has
grown from 1.2 percent in 1998 to 7.5 percent in 2012. And over 32 percent of the citizens
now live in the urban area and Indian cities contribute about 2/3 to the whole economic
output. (World Bank) Along with these growths, average people’s living standard
compared to other countries was also rising, ranking from 149 in 2000 to 120 in 2014
(measured by GDP per capita). (World Bank) However, behind these fascinating
multidimensional growths in India, problems are also obvious. Unlike the one child policy
in China, family planning program implemented in 1949 in India is then proved to be
inefficient, the population is still growing fast enough to consume a large portion of the
benefits getting from overall economy growth nowadays. Unbalanced urbanization and
industrialization caused that over 26% of all urban population in cities are living in slums.
There are still around 21.3% of the population living below $1.90 a day according to World
Bank report in 2011. (World Bank) Lacking of infrastructure, government corruption and
low human capital index are still blocking the way of growing.
Policy Context
Human capital is one of the main components that contributes to the growth. Education
is the quickest way to accumulate it. According to the Annual Status of Education Report
(ASER) in 2014, 96.7% of total rural children between ages of 6-14 were enrolled in
primary schools and girl’s enrollment rate has increased 19% compared to 2002. (“Annual
Status of of Educational Report” 85) In addition, World Bank indicated the primary school
around the whole country is 90% in 2013. While India is reaching the goal of universal
education quantitatively, the qualitative aspect of the education in India is still
questionable. A World Bank study based on an unannounced visit to Indian primary
schools shows that nationally, around 25% of teachers are absence every day, which

2. damage the quality of the education severely. (Kremer et al. 1) ASER also indicates that,
in the rural area, student attendance rate is 71.4% and the teacher attendance rate is
decreased from 87.1% in 2010 to 85.0% in 2014. Such dramatic absence rate not only
lowers the speed of human capital accumulation but also waste millions of government
funds towards education. Many evidence shows that the cause of this phenomenon is the
fact of low payment and high workload for teachers in India. Indian teachers complain
that the low income has decreased their passion for work and many of them feel
depressed. There is a very urgent demand for a policy that can incent teachers to not
only come to school but also perform better.
Policy Description
Teacher Performance Pay Program (TPPP) is an experimental government program that
was implemented in one of the states, Andhra Pradesh, in India trying to deal with the
high absence rate of instructors. The program tried to increase the teachers’ attendance
rate in order to increase the student’s learning outcome, which eventually will increase
the national human capital, by giving teachers 3 percent of their annual income as
bonuses based on the average improvement on their students’ test score. The incentive
program includes two types of incentive mechanism: group bonuses based on overall
school performance and individual bonuses according to teacher’s performance
individually. In theory, the teacher in both groups will be motivated by the extra income.
Given relatively constant teaching quality, education level of teacher and educational
environment measured by infrastructure index and pupil-teacher ratio etc., the only factor
they can make a difference is to spend more time on teaching. Consequently, with the
increase of time teachers spend at work, the change in students’ learning outcomes will
be expected to be positive.
Theory: The Labor-Leisure Model Explanation
We first assume that teachers only receive satisfaction from 2 goods: consumption (which
we denote by 𝐶) measured in dollars and leisure (𝑙) measured in units of time. Then we
assume teachers have an endowment of H units of time which do not include sleep and
they divide it between work (𝐿) and leisure (𝑙). For easy calculation, we let the price of all
goods to be 1 dollar, which makes the consumption be w*H. Then we have:
Time Constraint: 𝑙 + 𝐿 = 𝐻
Budget Constraint: 𝑝 ∙ 𝐶 = 𝑤 ∙ (𝐻 − 𝑙)
which lead us to have:
Labor Market Constraint: 𝑤 ∙ 𝑙 + 𝑝 ∙= 𝑤 ∙ 𝐻
By assuming that economic agents (teachers in this case) spend all their incomes, the
model shows us that the most a teacher can choose to spend on leisure is H units of time
(when 𝐶 =0) and the most he or she can consume is 𝑤 ∙ 𝐻 dollars (when 𝑙 =0). Another
assumption we made in this model is that teachers are indifferent between these two
goods and each good has a diminishing marginal rate of return, which means the more a

3. teacher has of one thing, the less willingly he or she will choose to give up another thing
to get that. Therefore, we have the downward convex indifference curve 𝐴𝐴′ and
teacher’s utilities are the same along with the curve. The optimal choice for the teacher
is at point 𝐸 where he or she has the highest utility.
After the Teacher Performance Pay program was implemented, 3% of annual income
bonuses based on teacher’s performance will let the maximum amount that a teacher can
expect to consume to be (1.03 ∙ 𝑤) ∙ 𝐻 but the maximum time he or she can spend on
leisure is left unchanged at level H. The budget constraint will then shift up and intersect
on Y-axis at (1.03 ∙ 𝑤) ∙ 𝐻. Accordingly, the indifference curve will shift up to 𝐵𝐵′and we
will have our new optimal point for teachers F. According to the World Bank data, India is
a lower-middle income country and as many articles have referred, the average income
level of Indian teacher force is relatively low compared to other countries or other
occupations in India. Thus, we can deduce that the income effect which economic agent
chooses to spend more time on leisure when they have higher wages is significantly lower
than the substitution effect which they choose to work more due to the expected higher
income. Then we have:
Therefore, theoretically, the policy will incent teachers to work more and the teacher’s
attendance rate will be increased. Noted that, in the model, the monitoring system is not
necessarily needed to ensure the policy achieve its goal because with the unchanged
quality of teaching force and the same education environment, the only way teachers can

4. improve their students’ learning outcome is through attending the class which they should
have and spend more time and effort in it.
Evidence
Teacher incentive policies were wild implemented in many countries for years. Many
theories have supported the effectiveness of them. The actual result of those policies and
empirical evidence to testify those theories, however, are still hardly presented. In order
to fill this gap and to mathematically measure the effectiveness of the incentive policy in
India, Karthik Muralidharan, a professor at UC San Diego, and Venkatesh Sundararaman
from World Bank published a report called: “Teacher Performance Pay: Experimental
evidence from India” on the Journal of Political Economy after years of research. Two
different types of teacher performance pay are studied by the researchers: group
performance pay according to the school overall performance and individual performance
pay based on teacher performance individually. They tried to analyze the outcome of the
program explicitly by using the difference in differences econometric method. In terms of
school selection, five districts in each of the three sociocultural regions of state Andhra
Pradesh were sampled randomly by the researcher in proportion to population. Within the
five districts, they selected one division in each of them, and 10 mandals (Administrative
division in state Andhra Pradesh) were sampled randomly in the selected division. And in
the overall 50 mandals, they used probability proportional to enrollment to randomly select
10 primary schools. In this way, the study was ensured to maximize the randomness and
minimize the selection biases in the selection process. In total 500 schools in the study,
300 of them are used for the incentive program analysis. 200 hundred of those schools
were given the incentive policy by random allocating and they were divided equally into
group-based incentive program and individual-based program. Those 200 schools
together were served as the treatment group. The rest of 100 schools were treated as the
control group, which stick with the original basic salary with no bonuses. Baseline school
characteristics are measured in order to keep other things constant to ensure the
improvement of student’s test score is only due to higher teacher’s attendance rate and
initial students’ mean test performance are provided for later comparison. After 2 years of
the program, the data shows that students in incentive schools are performed significantly
better than those in the control schools which can tell that the policy is working. “As an
average across both math and language, students in incentive schools scored 0.15 SD
higher than those in comparison schools at the end of the first year of the program and
0.22 SD higher at the end of the second year.” (P55 Teacher Performance Pay:
Experimental evidence from India) According to the evidence the study has presented to
us, we can say that the Teacher Performance Pay Program has achieved its intended
goal which is improving students’ learning outcome by increasing the teachers’
attendance rate.

5. Work Cited
“India Data”, The World Bank, 2014, http://data.worldbank.org/country/india
“Urban Population(% of total)”, The World Bank, 2014, http://data.worldbank.org/indicator
“GDP per capita”, PPP (current international $)”, The World Bank, 2014,
http://data.worldbank.org/indicator/NY.GDP.PCAP.PP.CD?display=default
“Poverty headcount ratio at $1.90 a day (2011 PPP) (% of population)”, The World Bank,
2013, http://data.worldbank.org/indicator/SI.POV.DDAY?display=default
“Annual Status of of Educational Report (Rural) 2014”, facilitated by Pratham, ASER
Center, 13 January 2015, pp 85-86
Michael Kremer, Karthik Muralidharan, Nazmul Chaudhury, Jeffrey Hammer and F.
Halsey Rogers. “Teacher Absence in India: A Snapshot”, Journal of The European
Economic Association, 15 September 2004, pp 1-4.
Karthik Muralidharan and Venkatesh Sundararaman. “Teacher Performance Pay:
Experimental Evidencefrom India”, Journal of Political Economy, vol. 119, no. 1, February
2011.