The effect of sorting students based on their academic performances depends not only on direct peer effects but also on indirect peer effects through teachers' efforts. Standard assumptions in the literature are insufficient to determine the effect of sorting on the performances of students and so are silent on the effect of policies such as tracking, implementing school choice, and voucher programs. We show that the effect of such policies depends on the curvature of teachers' marginal utility of effort. We characterize conditions under which sorting increases (decreases) the total effort of teachers and the average performance of students.