A SIGNALING THEORY OF GRADE INFLATION

William Chan, Hao Li and Wing Suen

International Economic Review, 2007, vol. 48, issue 3, 1065-1090

Abstract: When employers cannot tell whether a school truly has many good students or just gives easy grades, a school has incentives to inflate grades to help its mediocre students, despite concerns about preserving the value of good grades for its good students. We construct a signaling model where grades are inflated in equilibrium. The inability to commit to an honest grading policy reduces the efficiency of job assignment and hurts a school. Grade inflation by one school makes it easier for another school to do likewise, thus providing a channel to make grade exaggeration contagious. Copyright 2007 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

Date: 2007
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