Via Vox
"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."
"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."
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