Product Overview

Every manager faces the problem of motivating employees to show up to work, focus on the assigned task, and work hard. In the absence of strong motivations to work or close monitoring by managers, employees tend to shirk, a phenomenon that economists call 'moral hazard'. In view of this problem, the worker’s employment contract should be designed so that a part of the payoff (both monetary and non-monetary) is conditional on performance. In tasks where the manager can directly observe and monitor the worker’s effort, designing such a conditional contract is easy. For example, a salesperson is offered a bonus directly depending upon the number of items he sells. However, when the effort is not so easily observable, overcoming potential moral hazard becomes harder. Using different policy experiments conducted with teachers in India, Kenya and United States, this case study explores how to motivate school teachers to turn up for class, teach well and put in maximum effort towards educating their students.

Learning Objectives

The case is primarily intended for courses on Managerial Economics, Microeconomics, Organizational Economics and Human Resource Management taught in business and public policy schools. It can also be used in courses on the Economics of Education or similar topics. The strength of the case is grounding in research papers (published in leading journals) that report on rigorous evaluations of the impact of different compensation structures.