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Student sorting and implications for grade inflation

There is a sizable literature on higher education, both in the United States and beyond, that draws attention to the phenomenon known as grade inflation. We offer an interpretation of grade inflation that turns on the choices students have over academic departments, and we argue that patterns in grades cannot be considered in isolation from the incentives that students have to sort themselves strategically across departments. Our argument draws on a game-theoretic model in which students of varying abilities face a choice between enrolling in a department whose grades are inflated and thus ability-concealing versus enrolling in a department whose grades are ability-revealing. In equilibrium, all grades are high. Nonetheless, what appears to be grade inflation is a result of the fact that the ability-revealing department in our model attracts highly talented students seeking to distinguish themselves from students of lesser ability, who avoid said department because enrolling in it is costly. Our formalization shows how student sorting can confound grades, and it implies that a full understanding of university’s grade distribution requires knowing which departments in the university are ability-concealing and which, in contrast, are ability-revealing.