Grades as Noisy Signals


Brandon Joel Tan. Working Paper. “Grades as Noisy Signals.” Revise & Resubmit. Journal of Labor Economics.
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Letter grades are noisy and coarse measures of academic achievement. However, these grades serve as important signals to both employers and to the student on his or her ability. I study the consequences of these noisy measures using administrative data from the National University of Singapore which records both the letter grades as well as the precise marks (0-100) received for each course that a given student takes. I exploit a regression discontinuity design -- specifically, close to the letter grade cutoffs, individuals with very similar achievement will receive different letter grades. I find that receiving a better grade in a single class for students on the margin results in 32 US dollars greater monthly earnings post-graduation. Looking at each letter grade cut off, I find that the effect is largest at the A- cutoff, followed by the A and B+ cutoffs. There is a null effect for elective courses, which indicates that only signals for major-relevant courses are important. The effect is driven by courses taken in years 1 and 2 (years 3 and 4 are graduation years). The effects are significantly larger for men than women, and for STEM courses than non-STEM courses. There are two possible mechanisms: 1) Employers use grades as a signal of ability and thus pay similar students different salaries based on this coarse measure. 2) Students interpret better or worse grades as a signal of their own ability which affects their future behavior and outcomes. Testing the second mechanism, I find that receiving a worse grade for students on the margin results in only slightly lower grades in future semesters, but these students take significantly ``easier courses".  This indicates that students under invest in human capital accumulation as a result of receiving a noisy negative signal of ability.
Last updated on 07/02/2021