Implications of grade inflation: knowledge illusion and economic inefficiency in the knowledge market

In this paper, we adopt the neoclassical model of consumer choice and view students as a utility maximizer to investigate two implied issues caused by grade inflation – knowledge illusion and economic inefficiency in the knowledge market. These issues are important because they negatively impact the quality of higher education and weaken the signaling role of educational credentials in screening workers. More importantly, students eventually suffer a loss in well-being in the knowledge market and become less productive and competitive in the labor market.