Consistent with popular wisdom, higher-quality schools inflate grades more (in a rigorous statistical sense), capitalising on the fact that their students have higher ability on average to effectively mask their low-ability graduates. Schools weigh these tradeoffs, and in the competitive equilibrium of the school competition model, choose grading policies that assign As to some lower-ability students, confounding an employer’s ability to learn graduates’ ability precisely. But at the same time, assigning a larger range of students As deteriorates the value of an A, making their very best students less competitive. Doing so increases the portion of graduates with As, who are most competitive against graduates from other schools.

Schools choose to assign high grades to more than just its best students. Grade inflation arises endogenously in our model, as schools compete to place its graduates.

Students choose whether to exert effort in order to improve their expected ability. Second, schools strategically choose grading policies, which determine how grades are assigned to graduates with different abilities, and therefore the transcript distribution among its graduates. First, schools can undertake costly investments to improve the quality of education that they provide, increasing the average ability of graduates. Schools compete to place students with employers or graduate schools in two ways. We develop a game theory model to provide insights into school and student incentives. In Boleslavsky and Cotton (2014), we evaluate the merits of these arguments. It is therefore more difficult for employers and graduate schools to identify and select the most desirable candidates. If everyone gets As, then evaluators cannot infer from an A-student’s transcript that he is in any way exceptional. Second, when high grades are assigned liberally, they convey less information to employers, graduate schools, and other evaluators about a student’s ability.

First, weaker standards may compromise education quality, allowing students to devote less effort to their studies, while still expecting easy As.Throughout the literature, weaker grading standards are viewed as detrimental for education outcomes for two main reasons. (2007) show how universities have incentives to permit grade inflation by professors, as allowing grade inflation can improve the average placement of their graduates. Ostrovsky and Schwarz (2010), Bernhardt and Popov (2011) and Chan et al. A variety of papers investigate the causes of the grade inflation trend, which range from professors’ desire to help students avoid the Vietnam War draft in the 1960s, to more recently an increased commercialisation of education and greater reliance on student evaluations of professors (Rojstaczer and Healy 2012). The trend towards higher grades is often viewed as the result of deteriorating grading standards, which allow students to receive higher grades for lower-quality work. Many professors may relate to Rojstaczer’s claim: “I don’t give C’s anymore, and neither do most of my colleagues and I can easily imagine a time when I’ll say the same thing about B’s” (Rajstaczer 2003). Most of this increase can be attributed to an increase in the share of As assigned (which now comprise nearly half of all grades), with significant drops in the assignment of lower grades (Rojstaczer 2011 and Rojstaczer and Healy 2012). Since the early 1980s, the mean grade point average at American colleges and universities has risen at a rate of between 0.1 and 0.15 points per decade.

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