Think back to when you were a high school student. Remember all that time you spent slaving away, studying for those stress-inducing examinations, attending those tedious classes, and writing those ill-informed essays?
There must have been some days where your motivation was seriously waning—and for good reason. School can be extremely difficult, especially for those of us who are less academically gifted, and studying can take away much of our free time. Focusing on academics is even more difficult when you need a job outside of school to support yourself, and your family too.
Difficulties such as these can lead some students to drop out of school altogether. Although these students may see dropping out of high school as a good idea, dropping out typically has drastic socioeconomic consequences in the long-term. When compared with high school graduates, high school dropouts are more likely to earn substantially lower wages, be unemployed, suffer adverse health issues, and generate higher social costs for taxpayers through criminal activity and public assistance.1 Despite these long-term consequences, in 2017, over 500,000 students dropped out of high school in the U.S., while an even greater number were not enrolled in school at all.2
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Why, then, do students drop out of school if the long-term consequences are so negative? Often, students are not necessarily choosing to drop out of school, but rather, they are forced into it. Researchers classify school dropouts in three ways: Students may be “pushed” out of school due to poor discipline or bad grades, “pulled” out of school for reasons such as family or financial issues, or they may “fall out” of school due to a disillusionment with the education system.3
However, while these explanations are the typical reasons why students drop out, standard economic theory would suggest that students are being myopic if they drop out. From this perspective, it is irrational to choose the short-term benefits of dropping out over the lifetime gains of persevering and obtaining a diploma. Perhaps students are underestimating the higher returns from education, or experiencing survivorship bias4—mistakenly focusing only on the successful minority, without considering all those that failed. For example, some students may believe they can emulate highly successful high school dropouts like Richard Branson, not realizing that they are a statistical anomaly.
Paying students: A potential solution?
Despite the economists’ perspective, even if students are foregoing future rewards by dropping out, many students will feel like dropping out is their only option. But because the future benefits of completing a degree are so great, is it worth paying students to go to school?
This is not a particularly new idea, and some Nordic countries already provide financial incentives to go to school. Incentivizing students could allow them to put more effort into attending school and to care more about their studies, at least for long enough that they can complete their degree. This could particularly offset the challenges faced by students who come from financially disadvantaged backgrounds, as monetary incentives would allow these students to focus on their studies and not require an outside job, therefore reducing the probability of dropping out.
Of course, you might be thinking: shouldn’t attaining an education be enough motivation to stay in school? Wouldn’t paying students only make them care about the money, and not the education? These are common critiques of financial incentives for education, particularly since the literature has shown that monetary incentives (especially small ones) can sometimes crowd out the intrinsic motivation to do something.5,6 In other words, students may be only motivated to study for the money, while insufficient payments may diminish a student’s willingness to learn. And in fact, some studies have found that financial incentives override the desire to learn, at least in the short-term.7
However, the counter-argument to these concerns is that these monetary incentives would be most effective for preventing high-risk students from dropping out, such as those from highly disadvantaged backgrounds or those with poor academic performance. Since they are already at a high risk to drop out and are likely to be unmotivated anyway, by providing this financial motivation to stay in school, they would at least have some sort of incentive to complete their degree. Additionally, the money could also be given to parents rather than to students themselves, which would remove the possibility of money crowding out students’ intrinsic motivation to study hard. Instead, the monetary compensation may motivate parents to be more forceful in ensuring their kids attend school, while simultaneously alleviating some of their financial burdens.
Monetary incentives and dropout rates
As it turns out, financial incentives are remarkably effective in reducing dropout rates. For instance, in the initial phase of the PROGRESA program in Mexico, 506 rural villages were randomly assigned to participate in the program or serve as controls.8 Participating parents received financial incentives averaging $55 per month, approximately 1/5 of the average monthly income in Mexico—quite a substantial amount! The money was delivered on the condition that their children were enrolled in and attended school frequently.
The program was very successful, having a large effect on several educational outcomes such as reducing the dropout rate and increasing the school enrolment rate. Interestingly, the program also created peer effects, where siblings of students in the program were also less likely to drop out, even after the incentives disappeared. These results showed not only that financially incentivizing parents works to reduce dropouts, but it also leads to more forward-thinking behavior. Similar studies have been conducted in countries such as Colombia, and have also found similar results.9
Monetary incentives and academic achievement
Although financial incentives have proven to be very effective in reducing dropout rates, paying students to do well in exams might not be as effective, as various studies have shown non-existent or only modest improvements in academic performance when financial incentives are introduced.10
Does this mean that monetary rewards cannot motivate students enough to study harder? Not necessarily. One alternative explanation could be that students are sufficiently motivated by money, but they simply do not know how to study effectively. Unlike attending classes, success in improving academic achievement depends on many factors. Even if students are motivated to do well in school, they might not know how to translate their efforts into better grades.
This is what Fryer (2011) found with a large-scale study that involved conducting randomized field experiments in over 200 schools in the cities of Dallas, New York, and Chicago, with over $6.3 million paid out in incentives.11 One finding from this large-scale study was that financial incentives for attaining better grades were less effective than incentives for educational inputs which had easily achievable gradients for success, such as attendance, good behavior, or wearing uniforms.
Other studies have examined which groups of students benefit most from monetary incentives, and have found that financial incentives might not be effective at improving the grades of the best and worst-performing students, but can be very important in improving the performance of those in the middle of the pack—specifically, those whose existing performance is only slightly below the threshold for the monetary reward (on average a GPA on 2.96).12 Money therefore can be a motivating force for these students who just need that extra push to get to an acceptable standard of academic achievement.
However, these effects typically do not correspond to permanent changes in performance, as many of these students revert to their previous level once the incentives are removed. This suggests that there was a crowding-out effect where students were more motivated by the money rather than by the intrinsic motivation to do well, suggesting that persistent financial incentives are required to establish consistent improvement in academic performance. Interesting, financial incentives have also been shown to be much more effective at improving academic performance for girls than for boys.13, 14
Overall, the main takeaway from this research is that financial incentives can create positive short-run benefits for various educational outcomes. Paying students might not lead to them attaining better grades or create any permanent changes in philosophy when it comes to studying, but it can lead to them staying in school and finishing their high school diploma. This would at least allow students, particularly those who are already struggling, to gain valuable credentials and experience better future outcomes than most dropouts would. However, financial incentives have been shown to less effective at improving students’ grades. It may be that students don’t know how to achieve this goal, lacking appropriate study methods or feeling they’re unable to keep up with the materials. If this is the case, other solutions to improving academic performance, such as providing students with resources or mentors, would be more effective at improving grades than money would.
Of course, it’s very costly to impose financial incentives to improve educational outcomes, and other cheaper solutions might be preferred by policymakers. For instance, the U.K.’s Behavioural Insights Team has found that supportive text messages from a nominated support person (e.g. teacher, parent, friend) can improve school attendance,15 which could be a significantly cheaper way to solve these issues. More research is needed to gauge the effectiveness of different policies to improve educational outcomes, and how they compare with financial incentives in terms of cost-effectiveness.
 Rumberger, R. (2013). Poverty and high school dropouts. Retrieved 29 January 2021, from https://www.apa.org/pi/ses/resources/indicator/2013/05/poverty-dropouts
 Trends in High School Dropout and Completion Rates in the United States. Retrieved 29 January 2021, from https://nces.ed.gov/programs/dropout/findings.asp
 Doll, J. J., Eslami, Z., & Walters, L. (2013). Understanding Why Students Drop Out of High School, According to Their Own Reports: Are They Pushed or Pulled, or Do They Fall Out? A Comparative Analysis of Seven Nationally Representative Studies. SAGE Open. https://doi.org/10.1177/2158244013503834
 Survivorship bias – Biases & Heuristics. Retrieved 29 January 2021, from https://thedecisionlab.com/biases/survivorship-bias/
 Incentivization – Biases & Heuristics. Retrieved 29 January 2021, from https://thedecisionlab.com/biases/incentivization/
 Gneezy, U., & Rustichini, A. (2000). Pay enough or don’t pay at all. The Quarterly journal of economics, 115(3), 791-810.
 List, J. A., Livingston, J. A., & Neckermann, S. (2018). Do financial incentives crowd out intrinsic motivation to perform on standardized tests?. Economics of Education Review, 66, 125-136.
 Behrman, J. R., Sengupta, P., & Todd, P. (2005). Progressing through PROGRESA: An impact assessment of a school subsidy experiment in rural Mexico. Economic development and cultural change, 54(1), 237-275.
 Barrera-Osorio, F., Bertrand, M., Linden, L. L., & Perez-Calle, F. (2008). Conditional cash transfers in education: design features, peer and sibling effects evidence from a randomized experiment in Colombia. The World Bank.
 Gneezy, U., Meier, S., & Rey-Biel, P. (2011). When and why incentives (don’t) work to modify behavior. Journal of economic perspectives, 25(4), 191-210.
 Fryer Jr, R. G. (2011). Financial incentives and student achievement: Evidence from randomized trials. The Quarterly Journal of Economics, 126(4), 1755-1798.
 Levitt, S. D., List, J. A., & Sadoff, S. (2016). The effect of performance-based incentives on educational achievement: Evidence from a randomized experiment (No. w22107). National Bureau of Economic Research.
 Croson, R., and Gneezy, U. (2009). Gender Differences in Preferences. Journal of Economic Literature, 47 (2): 448-74.
 Angrist, J., and Lavy, V. (2009). The Effects of High Stakes High School Achievement Awards: Evidence from a Randomized Trial. American Economic Review, 99 (4): 1384-1414.
 Groot, B., & Sanders, M. (2017). Supportive text messaging to encourage student success. Retrieved 30 January 2021, from https://www.bi.team/blogs/supportive-text-messaging-to-encourage-student-success/
About the Author
Tony Jiang is a Staff Writer at the Decision Lab. He is highly curious about understanding human behavior through the perspectives of economics, psychology, and biology. Through his writing, he aspires to help individuals and organizations better understand the potential that behavioral insights can have. Tony holds an MSc (Distinction) in Behavioral Economics from the University of Nottingham and a BA in Economics from Skidmore College, New York.