This dissertation examines the impact of financial incentives on students’ academic achievement and households’ response to these incentives. Economic theory suggests that financial incentives can improve students’ academic performance by acting as a price subsidy to effort. Furthermore, short-term rewards can mitigate the likely underinvestment in schooling and cognitive abilities if students and parents have low perceived returns to education or high discount rates for future returns. On the other hand, incentives may lead to a worse performance due to a loss in students’ intrinsic motivation, that is, the innate desire to learn.
I conducted a randomized field experiment among students in public schools in Lalitpur district in Nepal. From a pool of 33 schools, 11 were randomly chosen to be in the treatment group while the remaining 22 constituted the control group. Grade eight students in the treatment schools were offered cash incentives that increased monotonically with their scores (e.g., piece-rate incentives) in each of the two semester exams and the end-of-the-year district level exam. To encourage students to pass, those who passed all subjects received twice the reward per score compared to those who failed one or more subjects.
Despite several experimental and institutional factors making it less likely of finding a positive treatment effect, I find that the incentives increased the average aggregate scores by approximately 0.14 standard deviations. There is no noticeable difference in gains between males and females and incentives had a relatively higher impact on students from higher socioeconomic strata and lower academic performance quartiles. This study contributes to the growing literature on the short-term impact of academic incentives by recording households’ response to the incentives. I show that the increase in aggregate scores is likely due to the increased availability of help with schoolwork at home, either from a hired tutor or a household member. Finally, financial rewards did not have an adverse impact on students’ intrinsic motivation to learn.
Policy implications of this study include the potential use of piece-rates incentive schemes in merit scholarships and cash transfer programs to encourage students with low ability. It also highlights the importance of improving students’ learning environment at home by increasing the involvement of parents in their children’s education and schooling.