Grade inflation: an economic analysis
The 2001 Nobel Prize in Economics was awarded to three economists
for their contributions to our understanding of the functioning of markets
when either buyers or sellers have an informational advantage. One of
the winners, Michael Spence, was specifically recognized for his insights
regarding signaling, the opportunity for market participants to undertake
actions that could lead others to infer a desirable attribute that cannot
be objectively verified. A vivid example of signaling is student grades.
If high ability students possess a distinct advantage in
the competition for grades, then attaining high grades can be a straightforward
means to signal ability level to interested outside observers (prospective
employers, graduate schools, etc.). However, for grades to provide a significant
amount of information to outsiders, it is necessary that lower ability
students not be able to feign high ability by achieving a high grade point
average. Unfortunately, this is exactly what is currently happening at
Bowdoin due to rampant grade inflation.
The information loss associated with grade inflation has
a number of undesirable effects. Not only are high ability students harmed
by the destruction of the signaling function of grades but employers,
and others, lacking the objective information that could be provided by
non-inflated grades, must turn to other strategies for identifying high
ability individuals. The importance of connections is enhanced. Statistical
discrimination is a more likely occurrence. (Statistical discrimination
occurs when employers make hiring decisions based not on an individual's
qualities, but on the statistical characteristics of the individual's
gender, race, ethnic origin, athletic affiliations, etc.) In addition,
graduate school admissions will be based more heavily on letters of recommendation,
which emphasizes whom, as opposed to what, a student knows.
It is also probable that high ability students will recognize
that there is little payoff to excelling. Their attention to academic
pursuits will likely be diminished resulting in a decline in the intellectual
environment at the College. These consequences of grade inflation harm
Any information provided by grades in a college-wide inflationary
environment is further degraded by differential grade inflation. When
departments across campus employ dramatically different grading standards,
course selection as much as ability determines grade point averages, and
it becomes impossible to render comparative ability judgments based on
That differential grade inflation is a problem at Bowdoin
is clear (see accompanying statistics). Of course, it might be argued
that the higher grades in some departments are due to a greater concentration
of high ability students in those departments. The logic of a signaling
model, however, suggests that the opposite is almost certainly the case.
Relatively weaker students most need opportunities to mask
their true ability level through attainment of high grades. Hoping to
enhance their GPAs, they will gravitate to departments offering the combination
of high mean/low variance grading. Conversely, high ability students benefit
from the opportunity to distinguish themselves, and so, on the margin,
will be attracted to departments offering higher variance grading.
The predicted result is, therefore, an inverse relationship
between grades and student ability across departments. Unfortunately,
outsiders do not possess the information necessary to distinguish departments
based on grading practices. So important information that could be conveyed,
for example, by major, is not available to those who need it. Again, when
the objective information grades could provide is eliminated, employers,
and others, will resort to more subjective, and potentially problematic,
alternative screening mechanisms.
It is worth noting that some have argued that current high
mean/low variance grading practices are due to a secular increase in student
quality, and thus not a problem. Even if student quality has improved,
however, the need for outsiders to acquire information regarding relative
ability remains. That is, employers and others may be quite pleased that
the overall pool from which they select is of enhanced quality, but be
assured that they still have a strong interest in identifying an individual's
relative ranking in the pool. So the fact that student quality may have
improved does not eliminate the important signaling function of grades.
Neither Bowdoin, nor American higher education more generally,
possesses any sort of general exit evaluation of graduating seniors. Among
other things, this assures that empirical verification of the preceding
analysis is essentially impossible. The theoretical conclusions are, however,
unambiguous. To the extent that signaling analysis is applicable, grade
inflation must have highly undesirable implications.
The obvious solution to grade inflation is institution of
a rigid grading curve. However, we suspect that such a proposal would
be unpopular. The most feasible alternative is to increase the information
content in grades by attaching benchmark information to student transcripts.
Providing interested outsiders with information about grade distributions
in a student's major department, as well as the College, would enhance
signal quality and enable departments to offer students the benefits of
high variance grading.
Interestingly, signaling theory implies that this strategy could produce grade deflation as departments attempted to attract the high ability students who most benefit from a tough grading policy. Perhaps counter-intuitively, the winners would be Bowdoin's most able and diligent students since our grades would provide the outside world with information not available regarding students at other schools.