When employers cannot tell whether a school truly has many good students or just gives easy grades, schools have an incentive to inflate grades to help mediocre students, despite concerns about preserving the value of good grades for good students. We construct a signaling model where grades are inflated in equilibrium. The inability to commit to an honest grading policy reduces the informativeness of grades and hurts schools. Grade inflation by one school makes it easier for another school to fool the market with inflated grades. Easy grades are strategic complements, providing a channel to make grade exaggeration contagious.
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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number
tecipa-222.
Length: 40 pages Date of creation: 17 Jun 2005 Date of revision: Handle: RePEc:tor:tecipa:tecipa-222
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Article
William Chan & Li Hao & Wing Suen, 2007.
"A Signaling Theory Of Grade Inflation,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(3), pages 1065-1090, 08.
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Ettore Damiano & Hao Li & Wing Suen, 2006.
"Credible Ratings,"
Working Papers
tecipa-219, University of Toronto, Department of Economics.
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Other versions:
Damiano, Ettore & Li, Hao & Suen, Wing, 2006.
"Credible Ratings,"
Micro Theory Working Papers
damiano-06-01-17-01-56-45, Microeconomics.ca Website, revised 17 Jan 2006.
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