Teacher quality and incentives Theoretical and empirical effects of standards on teacher quality

Applying the theory of yardstick competition to the schooling system, we show that it is optimal to have central tests of student achievement and to engage in benchmarking because it raises the quality of teaching. This is true even if teachers’ pay (defined in monetary terms) is not performance related. If teachers value reputation, they increase effort if the output of teaching is measured. The theory is tested using the German PISA-E data. Our matching estimates suggest that, despite the flat career profile of German teachers, the quality of teaching tends to be higher in federal states with central exams.