The effect of financial rewards on students' achievement: Evidence from a randomized experiment

Edwin Leuven
Hessel Oosterbeek
Bas van der Klaauw

March 2005

In a randomized field experiment where first year university students could earn financial rewards for passing the first year requirements within one year we find small and non-significant average effects of financial incentives on the pass rate and the numbers of collected credit points. There is however evidence for het- erogeneous treatment effects. In particular, in the first year high ability students have higher pass rates and collect significantly more credit points when assigned to (higher) reward groups. Low ability students collect less credit points when assigned to higher reward groups. After three years these effects have increased, suggesting dynamic spillovers. The small average effect is therefore the sum of a positive effect of high ability students and a (partly) off-setting negative effect for low ability students. A negative effect of financial incentives for less `capi- talized' individuals is in line with research from psychology and recent economic laboratory experiments which shows that external rewards may be detrimental for intrinsic motivation.

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Last updated: March 9, 2005.