Grade Inflation

37 Pages Posted: 8 Feb 2003

See all articles by William M. Chan

William M. Chan

The University of Hong Kong - School of Economics and Finance

Hao Li

University of Toronto - Department of Economics; Queen's University - Department of Economics

Wing Suen

The University of Hong Kong - School of Economics and Finance

Date Written: October 6, 2002

Abstract

When employers cannot tell whether a school truly has many good students or whether it is just giving easy grades, schools have an incentive to inflate grades to help their mediocre students. However schools also care about preserving the value of good grades for their good students. We construct a signaling model in which grade inflation is the equilibrium outcome. The inability to commit to an honest grading policy in an environment of private information reduces the informativeness of grades and hurts the school. We also show that grade inflation by one school makes it easier for another school to fool the market with grade inflation. Hence easy grades are strategic complements, and this provides a channel to make grade inflation contagious.

Keywords: signaling model, pooling equilibrium, strategic complementarity

Suggested Citation

Chan, William M. and Li, Hao and Suen, Wing C., Grade Inflation (October 6, 2002). Available at SSRN: https://ssrn.com/abstract=336880 or http://dx.doi.org/10.2139/ssrn.336880

William M. Chan

The University of Hong Kong - School of Economics and Finance ( email )

8th Floor Kennedy Town Centre
23 Belcher's Street
Kennedy Town
Hong Kong
+85 2 2859 2192 (Phone)
+85 2 2548 1152 (Fax)

Hao Li (Contact Author)

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S 3G7
Canada
416-978-5105 (Phone)

Queen's University - Department of Economics ( email )

Dunning Hall
Kingston, Ontario K7L 3N6
Canada
613-533-2275 (Phone)
613-533-6668 (Fax)

HOME PAGE: http://www.econ.queensu.ca/pub/faculty/li/

Wing C. Suen

The University of Hong Kong - School of Economics and Finance ( email )

8th Floor Kennedy Town Centre
23 Belcher's Street
Kennedy Town
Hong Kong
852 2859 1052 (Phone)
852 2548 1152 (Fax)

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