VoxEU Column Education Labour Markets

The unrecognised benefits of grade inflation

Grade inflation is widely viewed as detrimental, compromising the quality of education and reducing the information content of student transcripts for employers. This column argues that there may be benefits to allowing grade inflation when universities’ investment decisions are taken into account. With grade inflation, student transcripts convey less information, so employers rely less on transcripts and more on universities’ reputations. This incentivises universities to make costly investments to improve the quality of their education and the average ability of their graduates.

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. 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). 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).

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. 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). Ostrovsky and Schwarz (2010), Bernhardt and Popov (2011) and Chan et al. (2007) show how universities have incentives to permit grade inflation by professors, as allowing grade inflation can improve the average placement of their graduates.

Throughout the literature, weaker grading standards are viewed as detrimental for education outcomes for two main reasons.

  • First, weaker standards may compromise education quality, allowing students to devote less effort to their studies, while still expecting easy As.
  • Second, when high grades are assigned liberally, they convey less information to employers, graduate schools, and other evaluators about a student’s ability.

If everyone gets As, then evaluators cannot infer from an A-student’s transcript that he is in any way exceptional. It is therefore more difficult for employers and graduate schools to identify and select the most desirable candidates.

A model of grade inflation

In Boleslavsky and Cotton (2014), we evaluate the merits of these arguments. We develop a game theory model to provide insights into school and student incentives. Schools compete to place students with employers or graduate schools in two ways. First, schools can undertake costly investments to improve the quality of education that they provide, increasing the average ability of graduates. 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. Students choose whether to exert effort in order to improve their expected ability.

Grade inflation arises endogenously in our model, as schools compete to place its graduates. Schools choose to assign high grades to more than just its best students. Doing so increases the portion of graduates with As, who are most competitive against graduates from other schools. 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. 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. 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.

If we hold school investments in education quality fixed, then the presence of grade inflation in our model is unambiguously bad. Implementing policies requiring schools to abide by strict grading standards makes it easier for employers, graduate schools, and other evaluators to observe graduate ability, and select the highest-ability graduates. This leads to higher student effort, more efficient placements, and better outcomes for employers and graduate schools.

The effect of allowing grade inflation on educational investments

The main contribution of Boleslavsky and Cotton (2014) is to study the impact of grade inflation on outcomes when investments in education quality are endogenous, chosen by schools as they anticipate equilibrium grading policies. Our analysis reveals a surprising link between grade inflation and investment in education quality – schools invest more when they are allowed to inflate grades than when grade inflation is banned.

When forming beliefs about a student’s ability, an employer takes into account the student’s transcript and the reputation of the school from which the student graduated. With grade inflation, student transcripts convey less information, and therefore the employer relies less on transcripts and more on school reputation when evaluating graduates. In this way, grade inflation increases the incentives that schools have to undertake costly investments to improve quality of education, and the average ability of their graduates. To the extent that school investments and a student’s own study efforts are strategic complements in human capital development, students who anticipate greater investments by schools in turn have greater incentives to increase their own efforts.

Welfare implications

This analysis therefore reveals an important tradeoff in the debate over grade inflation. Allowing grade inflation increases investment in education (by both schools and students), increasing average graduate ability. But at the same time, it introduces noise into transcripts, making it more difficult for employers or other evaluators to identify the most qualified graduates for their positions. We show that the beneficial effect on investment may dominate the costs of increased noise. Allowing grade inflation may actually increase the chance that the employer selects a high-ability graduate. That suggests that even if a policy intervention could eliminate grade inflation, doing so is not necessarily the most socially desirable course of action.

Therefore, the central concerns over grade inflation may not be valid once incentives for schools to invest in the quality of education are taken into account. Although the freedom to grade strategically allows schools to distort the informational content of grades (which they do in equilibrium), it also creates additional incentives for schools to improve the quality of education and students to increase effort. Compared to a setting in which grades are necessarily fully informative, the increase in education investments can lead to employers, graduate schools, and other evaluators being better off.


Boleslavsky, Raphael and Christopher Cotton (2014), “Grading standards and education quality”, Forthcoming in American Economic Journal: Microeconomics.

Chan, William, Hao Li, and Wing Suen (2007), “A Signaling Theory of Grade Inflation”, International Economic Review, 48(3): 1065–1090.

Ostrovsky, Michael and Michael Schwarz (2010), “Information Disclosure and Unraveling in Matching Markets”, American Economics Journal: Microeconomics, 2(2): 34–63.

Popov, Sergey and Dan Bernhardt (2013), “University Competition, Grading Standards and Grade Inflation”, Economic Inquiry, 51(3): 1764–1778.

Rojstaczer, Stuart (2003), “Where All Grades Are Above Average”, The Washington Post, 28 January.

Rojstaczer, Stuart and Christopher Healy (2012), “Where A Is Ordinary: The Evolution of American College and University Grading, 1940–2009”, Teachers College Record, 114(7): 1–23.

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