Paying students for grades

This article in the NYT challenges my biases:
For decades, psychologists have warned against giving children prizes or money for their performance in school. “Extrinsic” rewards, they say — a stuffed animal for a 4-year-old who learns her alphabet, cash for a good report card in middle or high school — can undermine the joy of learning for its own sake and can even lead to cheating.

But many economists and businesspeople disagree, and their views often prevail in the educational marketplace. Reward programs that pay students are under way in many cities. In some places, students can bring home hundreds of dollars for, say, taking an Advanced Placement course and scoring well on the exam.

I'm with the psychologists. Why?
1. Because this is something designed by economists - the same ones who brought us pay for performance and bonuses for financial executives. Sure, they will claim to be exculpable by saying incentives were badly designed because performance was badly mismeasured. If they are so convinced this works at each and every level then why don't they pay their own graduate students?
2. My reading is that the study is not very well designed in the following sense: Some economists will argue that it is not the grade on the test that should be the measure of performance but the long run life time income that the individual will earn. (This would be my measure of performance.) This measure is highly unrealistic but there are not enough efforts to create a better measure. Instead, economists are defaulting to the path of least resistance - grades, stock price index, whatever and these default measures do not measure what we are ultimately interested in.
3. The study does not "unpack" the relative importance of extrinsic and intrinsic rewards. In fact very little is being done in many economic studies to study the "black box" of what works.

I am skeptical but if the studies start to go down a different path that addresses #2 and #3 then I am willing to be convinced.

Update (5/28/09): This paper on paying people to lose weight versus posting a bond for losing weight may be relevant.

Obesity rates in the U.S. have doubled since 1980. Given the medical, social, and financial costs of obesity, a large percentage of Americans are attempting to lose weight at any given time but the vast majority of weight loss attempts fail. Researchers continue to search for safe and effective methods of weight loss, and this paper examines one promising method - offering financial rewards for weight loss. This paper studies data on 2,407 employees in 17 worksites who participated in a year-long worksite health promotion program that offered financial rewards for weight loss. The intervention varied by employer, in some cases offering steady quarterly rewards for weight loss and in other cases requiring participants to post a bond that would be refunded at year's end conditional on achieving certain weight loss goals. Still others received no financial incentives at all and serve as a control group. We examine the basic patterns of enrollment, attrition, and weight loss in these three groups. Weight loss is modest. After one year, it averages 1.4 pounds for those paid steady quarterly rewards and 3.6 pounds for those who posted a refundable bond, under the assumption that dropouts experienced no weight loss. Year-end attrition is as high as 76.4%, far higher than that for interventions designed and implemented by researchers.