As a new academic year approaches in much of the world, it is worthwhile thinking about grade inflation. In an innovative essay Raphael Boleslavsky and Christopher Cotton challenge the widespread viewer that grade inflation is detrimental because it compromises the quality of education and reduces the information content of student transcripts for employers. They argue “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.”
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.