Friday, 14 October 2011

Incentives matter: grades file

It is interesting that students in many of the top M.B.A. programs in the U.S. vote for grade non-disclosure policies which have the effect of reducing the signal that a potential employer gets of a student's ability. Why? It seems strange that top students would vote to give employers less information about themselves.

The first thing to note here is that in the U.S., by federal law universities can not release academic grades to third parties without the student's permission. Since academic grades are the property of the students, and not the university that they attend, students can vote to create a "social norm" of grade non-disclosure to potential employers.

Notice that grade non-disclosure policies in U.S. M.B.A. programs are concentrated within highly-ranked schools. A majority (9) of the most selective 15 schools have a grade non-disclosure policy, while no school ranked 20 - 50 has such a policy. A new NBER working paper, Grade Non-disclosure by Daniel Gottlieb and Kent Smetters, sets out to explain this. Gottlieb and Smetters write,
We show that students at elite schools are the most likely to adopt a non-disclosure policy, subsequently reducing their effort. Intuitively, a non-disclosure policy allows the median voter to study less and then pool to receive the expected (mean) wage, which might be more valuable to her than receiving the median wage with effort. For plausible wage distributions, the desire to pool becomes more valuable at more selective schools.
The decision on grade disclosure is made by a majority vote. So, how will the median voter vote? The median student’s decision must balance his own productivity, and thus wage, under disclosure against the expected pooled wage that he would receive under non-disclosure. Under non-disclosure he will receive the average wage for students from the school he attends. Under disclosure he will get a wage based on his, not the average, productivity. So the choice is, basically, between the average wage and the median wage - given we are talking about the median student here. If the mean-median wage gap is "large", non-disclosure is an attractive choice. A vote for non-disclosure allows the median voter to, essentially, "free ride" on the expected pooled wage. This can be advantageous to such a voter when there are enough students who are more productive than the median student. Gottlieb and Smetters continue,
The disclosure policy, therefore, depends on the skewness of the distribution of ability.
Selective business schools
will adopt grade non-disclosure policies while less selective schools will not if the mean-median gap is increasing in school selectivity. The increasing mean-median gap assumption states that higher selectivity increases the quality of students by attracting a disproportionately higher amount of very good students.
So if you are bad at a good school you can free ride on those who are good at the school.

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