Each year, public schools are rewarded with bigger budgets for achieving a rating of "excellent" or "recommended" and are punished for rating "needs improvement."

These ratings are based on meeting thresholds on a broad set of measures such as attendance rates, graduation rates, standardized test scores, SAT scores, and so on.

Discuss the incentives for school principals (who are the agents, in this case) under this scheme and how you might improve them.