Performance Incentives in Education

We conduct a field experiment studying how financial incentives for meeting grade-based performance goals affect university students. We find that incentives reduce performance, particularly among low-ability students assigned ambitious goals. Survey data suggest this arises from a mismatch between assigned goals and ability: incentives distort expectations and reference points, moving students away from the performance targets they would otherwise set for themselves. The negative effects are concentrated among groups with the largest distortions. Allowing students to choose their goals mitigates negative effects but does not eliminate them. Our results caution against incentives in education and identify a novel backfiring mechanism.