Measuring Quality for Use in Incentive Schemes: The Case of "Shrinkage" Estimators
CESifo, Munich, 2018
CESifo Working Paper No. 7163
![](https://cesifo.org/DocImg/cesifo1_wp7163.jpg?c=1689237079)
Researchers commonly “shrink” raw quality measures based on statistical criteria. This paper studies when and how this transformation’s statistical properties would confer economic benefits to a utility-maximizing decisionmaker across common asymmetric information environments. I develop the results for an application measuring teacher quality. The presence of a systematic relationship between teacher quality and class size could cause the data transformation to do either worse or better than the untransformed data. I use data from Los Angeles to confirm the presence of such a relationship and show that the simpler raw measure would outperform the one most commonly used in teacher incentive schemes.
Economics of Education
Empirical and Theoretical Methods