Grading Standards and Education Quality
43 Pages Posted: 5 Jun 2013 Last revised: 30 Jul 2014
Date Written: June 15, 2014
We consider a game in which schools compete to place graduates by investing in education quality and by choosing grading policies. In equilibrium, schools strategically adopt grading policies that do not perfectly reveal graduate ability to evaluators (including employers and graduate schools). We compare equilibrium outcomes when schools grade strategically to equilibrium outcomes when evaluators perfectly observe graduate ability. With strategic grading, grades are less informative, and evaluators rely less on grades and more on a school’s quality when assessing graduates. Consequently, under strategic grading, schools have greater incentive to invest in quality, and this can improve evaluator welfare.
Keywords: Grade inflation, Bayesian persuasion, education quality
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