The teacher shortage is a critical issue in many rural areas around the world. This paper presents the findings of two studies that investigated the impact of financial incentives on teacher attraction and retention in rural schools in Western China. Using the theory of compensating wage differentials and a mixed-method approach, we found that providing living subsidies to student-teachers has an impact on teacher attraction but not retention, while tuition fee and loan reimbursements have a positive impact on both attraction and retention. For teachers already teaching in rural schools, the amount of the living subsidy, satisfaction with the policy, and identification of the policy are the key factors that affect the success of the policy. We argue that for the subsidy amount to be effective, it should be based on feedback from rural teachers and be at least 15% of their monthly salary.