Academic journal article Economic Inquiry

University Competition, Grading Standards, and Grade Inflation

Academic journal article Economic Inquiry

University Competition, Grading Standards, and Grade Inflation

Article excerpt


Universities award grades to measure the performance of students in courses. In turn, important decisions by third parties are based in part on grade point averages (GPAs)--firms tend to offer higher wages to students with high GPAs, and graduate schools tend to admit high GPA students. (1) In this article, we study how universities choose grading standards when they care about the decisions made by third parties based on GPAs. We then characterize how student body qualities at different schools interact with the depth of the job market to affect equilibrium grading standards.

We show how this strategic competition between universities can reconcile three central empirical regularities describing grading over the past 50 years: (1) GPAs are higher at better schools, (2)GPAs have risen over time at all schools, and (3)grading standards have fallen faster over time at better schools.

It is manifest that better universities award more high grades. For example, Rojstaczer (2003) finds that GPAs at private universities in 2006-2007 were 0.3 higher than at public universities. Figure 1 reinforces these findings, presenting the evolution of grades at selected universities between 1960 and 2000. This figure reveals that grades at better universities are uniformly higher. The figure also highlights a uniform secular rise in GPAs over time. In addition, over the entire sample period, GPAs at better universities increased significantly faster: the mean grade inflation at better universities significantly exceeds 0.5933 (p value .0073), the average increase at lesser universities, although there is no significant difference in grade inflation in different universities between 1980 and 2000 (Table 1).

We develop a model in which universities are distinguished by the distributions of "academic abilities" of their students: the distributions of student academic abilities at better schools conditionally stochastically dominate those at lesser schools. Firms value both academic ability and non-academic skills that firms can observe directly, which are complements in production. There are two types of jobs, good and bad, which are distinguished by the higher marginal product of skills in good jobs. Good jobs are in limited supply. Universities determine which students receive "A" grades by setting endogenously chosen cutoffs on academic ability. Firms learn some aspects of a student's non-academic skills via job interviews, and forecast academic abilities using the information contained in the ability distribution at a student's university, the university's grading standard, and the student's grade. Firms then assign jobs: students with higher expected productivities are assigned "good" jobs where the marginal product of skill is higher.

Universities understand how firms determine job placement and wages, and set grading standards to maximize the total expected wages of their graduates. Top universities would argue that their higher proportions of high grades simply reflect their better student bodies; a common grading standard would inevitably lead to more good grades at better schools. A central finding of our analysis is that under weak conditions, top universities set softer grading standards: the marginal "A" student at a top university is less able than the marginal "A" student at a lesser university. The intuition for this result devolves from the basic observation that a marginal student at a top school can free ride on the better upper tail of students because firms cannot distinguish "good A" students from "bad A" students. In contrast, lesser schools must compete for better job assignments by raising the average ability of students who receive "A" grades, setting excessively high grading standards.

Importantly, a social planner who seeks to maximize total output in society would choose the opposite ordering, setting more demanding grading standards at top schools whenever there is heterogeneity among students in observable non-academic skills. …

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