When Incentives Matter Too Much: Explaining Significant Responses to Irrelevant Information

When economic agents have access to both a continuous variable and a discrete signal based on that variable, theory suggests that the signal should have no bearing on behavior conditional on the variable itself. Numerous empirical studies, many based on the regression discontinuity design, have contradicted this basic prediction. We examine one such scenario, involving the educational accountability system implemented in North Carolina public schools until 2009. Results are consistent with a model of learning and imperfect information. Importantly, seemingly irrational responses are least common in schools led by highly experienced principals. * Ahn: [email protected]; Vigdor: [email protected]. The authors gratefully acknowledge financial support from the Institute for Education Sciences, award #R305A090019. Vigdor further acknowledges support via the Center for the Analysis of Longitudinal Data in Education Research (CALDER). The authors are grateful to John Holbein for research assistance and to 2013 Southern Economic Association conference attendees and seminar participants at the University of Colorado for helpful comments on an earlier draft. Any opinions expressed herein are those of the authors and not any affiliated organization.