Eli Dourado

Should schools be run like law firms?

There’s a lot of money in education. According to an article a friend posted on Twitter yesterday, Philadelphia spends $400,000 per classroom of 25 students per year. Other cities are similarly lavish.

In spite of this spending, urban public schools are usually terrible. There is no simple solution to this problem (read Bill Easterly — 1, 2 — and insert “learning” and “education” for “growth” and “development”), but reflecting on the exorbitant amounts of money on the table helped me focus on the incentive problems encountered by the education industry. I realized that similar problems have been solved by law firms.

Imagine that there are two kinds of performance measures. One loosely correlates with what it is that we want from our agents and is publicly verifiable. Because this performance measure is publicly verifiable, we can use it as a basis for writing contracts or regulations or whatever. The second performance measure correlates more strongly with what it is that we want, but is verifiable only by people with specialized skill, such as fellow-agents.

This describes the situation in both education and law. In both fields, there are simple metrics that are publicly verifiable that loosely capture what it is we want from workers. In education, examples are test scores and graduation rates; in law, it’s billable hours. Nevertheless, the attempt to rely on these metrics alone to motivate production are doomed to failure: they do not correlate closely enough with what we actually want, quality education or legal services. The incentives are to game the system, to teach to the test, to bill too many hours, etc.

Fellow-agents are capable of evaluating each other on another basis, one which by assumption correlates more strongly with what we want from them. Left to their own devices, they will shy away from doing so, because it is unpleasant to evaluate others, potentially hurting feelings and rocking the boat. This is the problem that law firms have solved. They have done so by organizing as partnerships. Because a partner’s pay is dependent on the quality of the work done by the other partners and employees, there is an incentive to engage in mutual monitoring to ensure that one’s co-workers are in fact doing quality work.

Would mutual monitoring work in schools? I think so. Teachers know who the other good teachers are. Because schools are typically run in a top-down fashion and answer to external authorities, there is an incentive to keep this information private. But if schools were organized on the law firm model and teachers could keep the surpluses generated by quality improvements, I predict that there would be a lot of quality improvements. A prerequisite for this approach is that quality improvements generate surpluses; schools organized on this model would need to be private.

The partnership approach to school organization would solve some other problems as well. First, much of the money spent on education today is captured by administrators. This is true in both private and public schools. The partnership form makes agents sensitive to the amount wasted on administration. This increases the resources available to actually educate people. Second, mutual monitoring will improve teacher quality in three ways: by discarding bad teachers, by motivating existing teachers to excellence, and by drawing new talent into a higher-paying profession. Higher quality teachers, with higher marginal products, will earn more pay in market equilibrium. To the extent that complaints about “low” teacher pay are valid, adopting the partnership form should address them.

When discussing incentive problems, economists often talk about the mistake of rewarding what is measurable at the expense of what you actually want, which is often not measurable. Incentives, that is, can be too strong. Test scores and graduation rates are measurable, and the results of attempts to enact measurement-based accountability in education have been disappointing. The insight of the literature on partnerships is that you can reward on the basis of quality dimensions that are not precisely measurable. Organizing schools as partnerships might have a significant effect on the quality of education they produce.