Grading Standards and Education Quality

We consider school competition in a Bayesian persuasion framework. Schools compete to place graduates by investing in education quality and by choosing grading policies. In equilibrium, schools strategically adopt grading policies that do not perfectly reveal graduate ability to evaluators. We compare outcomes when schools grade strategically to outcomes when evaluators perfectly observe graduate ability. With strategic grading, grades are less informative, and evaluators rely less on grades and more on a school's quality when assessing graduates. Consequently, under strategic grading, schools have greater incentive to invest in quality, and this can improve evaluator welfare. (JEL D82, I21, I23)