Grade Inflation and Education Quality

We consider a game in which schools compete to place graduates in two distinct ways: by investing in the quality of education, and by strategically designing grading policies. In equilib- rium, schools issue grades that do not perfectly reveal graduate abilities. This leads evaluators to have less-accurate information. However, compared to fully-revealing assessments, strategic grading motivates greater investment in educating students. Although strategic grading distorts placement decisions, it can also increase graduate ability. Allowing grade in ation and related grading strategies can increase the probability that the evaluator selects a high-ability graduate.