Everyday Economics

Grade Expectations

Why grade inflation is bad for schools–and what to do about it.

Next month, college students around the country will return to campus, hoping, among other things, to achieve high grades. Of course, “high” is a moving target. I remember when C meant “average”; today, whenever I turn in my students’ final grades, the dean’s office instructs me to treat C as the “minimum acceptable grade.” This side of Lake Wobegon, we call that grade inflation.

It’s a cliché that when grades are inflated they convey less information. The cliché is only half true. On the one hand, inflated grades fail to distinguish between the merely above-average and the truly superior. But on the other hand, inflated grades do a super job of distinguishing among fine gradations of weakness. When the average grade is B, the strong students are all lumped together with A’s, while the weak ones are sorted into C’s, D’s, and F’s.

That’s still a net loss in valuable information, because employers care more about making distinctions at the top than about making distinctions at the bottom. Therefore, college degrees, which derive their value from the information they carry, become less valuable on average. Here’s a quick example: Mary the A student is worth $40,000 to an employer and Jane the B student is worth $30,000; if grade inflation makes it impossible to tell them apart, you might expect an employer to offer them $35,000 apiece. But the inability to distinguish Mary from Jane makes it harder to assign them to appropriate tasks. That lowers their average value to, say, $32,000, which is what they both get paid. Jane wins and Mary loses, but Mary’s loss exceeds Jane’s gain.

Does that mean that above-average students should object to grade inflation? Not necessarily, because students do not live by starting salaries alone. There are advantages to living with less competitive pressure, and those advantages could more than offset the financial losses.

Besides, students don’t bear the full burden of those financial losses. As degrees become less valuable, colleges must cut tuition or lose enrollments. (Or, more precisely, they must sacrifice some growth in tuition or in enrollments, both of which have been rising for reasons that have nothing to do with grade inflation.) A college that can distinguish itself from the pack by maintaining high standards should be able to reap substantial rewards in the marketplace, because its degrees are worth more.

I f colleges pay the price for grade inflation, why do they allow it? Partly, it’s because colleges don’t assign grades. Professors assign grades, and professors face perverse incentives. Being human, they tend to take a special interest in their own students and are therefore tempted to give those students a boost at the expense of the anonymous strangers who signed up for someone else’s class. Besides, easy graders are more popular on campus. The costs of leniency–measured in lost reputation–are spread over the entire school, while the benefits are concentrated in the professor’s own classroom. Therefore the professor is biased toward leniency.

The problem, then, is in the gap between the professor’s interests and the college’s. Any solution must involve narrowing that gap. That’s where tenure comes in. An untenured professor is like a corporate bondholder–as long as the institution stays above water in the short run he’s happy. A tenured professor is like a corporate stockholder–he has a permanent stake in the fortunes of the institution. Professors should have job security for the same reason Alan Greenspan should have job security: It instills a healthy respect for the long run.

A ccording to a widespread belief, grade inflation took off during the Vietnam War era, in response to the idiosyncrasies of the Selective Service System. According to an equally widespread belief, the late ‘60s and early ‘70s were also a time when tenure became far more elusive. Professors began moving from one school to another every few years, with little reason to care about the reputational damage they left in their wakes. So perhaps the war was irrelevant; grade inflation was the inevitable consequence of upheaval in the tenure system.

But tenure is at best a partial solution to the incentive problem, because even a tenured professor shares only a fraction of his institution’s successes and failures. Let me propose some improvements. First, college transcripts could show each professor’s overall grade distribution, allowing employers to interpret each individual grade in context. Then, instead of damaging his colleagues’ credibility, the easy grader would damage only his own. Second, the dean’s office could assign each professor a “grade budget” consisting of a certain number of A’s, B’s, etc. Once you’ve awarded, say, 10 A’s, you can’t award any more till next year. (To cover extraordinary circumstances, I’d be willing to allow horse-trading among professors–three A’s for five B’s, say–and perhaps occasional borrowing against next year’s budget.)

A grade budget is not exactly the same thing as a mandatory curve, because it would allow professors the flexibility to give more high grades in one class if they’re willing to give fewer in another. Still, every now and then, a professor would have four genuine A students and only three A’s to give out. One of those students would suffer unjustly. But the A students are precisely the ones who suffer unjustly from grade inflation. The question is not how to eliminate injustice–which is, as always, impossible–but how to minimize it.

For the individual professor, a grade budget is a stifling constraint. That doesn’t make it a bad thing. Economic theory tells us that when everyone is polluting a communal stream, everyone can benefit from enforced moderation. It always hurts to be constrained, but sometimes it’s worth it if your neighbors are constrained too. With grade budgets, professors would be forced to give fewer A’s, but the A’s they gave would be more valuable.

If grade budgets are such a good idea, why don’t we have them? That’s a question about politics, not economics, so maybe it’s best directed to a different sort of expert. In cases like this, it’s the economist’s job to explain where we ought to be headed, and the political scientist’s job to explain why we can’t get there from here.