We address the challenge of designing performance-based incentive schemes for schoolteachers. When teachers specialize in different subjects in a society with social prejudice, performance-based pay that depends on the average of student performance can cause teachers to coordinate their effort on high status students. Laboratory experiments conducted in India with future teachers as subjects show that performance-based pay causes teachers to decrease effort in low caste Hindu students compared to upper caste Hindu or Muslim students. We observe greater effort and lower variation in an incentive design where teachers are penalized if students receive zero scores.
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