Teacher Compensation and Structural Inequality: Evidence from Centralized Teacher School Choice in Peru

We exploit data on the universe of public-school teachers and students in Perú to establish that wage rigidity makes teachers choose schools based on non-pecuniary factors, magnifying the existing urban-rural gap in student achievement. Leveraging a reform in the teacher compensation structure, we provide causal evidence that increasing salaries in less desirable locations is effective at improving student learning by attracting higher-quality teachers. We then build and estimate a model of teacher sorting across schools and student achievement production, whereby teachers are heterogeneous in their preferences over non-wage attributes and their comparative advantages in teaching different student types. Counterfactual compensation policies that leverage information about teachers’ preferences and value-added can result in a substantially more efficient and equitable allocation by inducing teachers to sort based on their comparative advantage.