“Students Prefer Larger Postschool Wages But Dislike Studying”

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That’s how two Wharton professors, Daniel Gottlieb and Kent Smetters, model their students in a recent paper that tries to explain why so many business schools have policies – typically adopted by student vote – that prevent students from disclosing their grades to employers. Seems reasonable!

We construct a model with students, schools, and employers. Students prefer larger postschool wages but dislike studying. Schools are heterogenous in their selectivity (reputation). Under disclosure, employers can observe both a student’s grades and the school’s selectivity; under non-disclosure, an employer can only observe the partial signal of the school’s selectivity.

That model leads to a bunch of equations (no charts, sorry) with conclusions that again seem pretty reasonable. The driving force for preferring a non-disclosure policy turns out to be that mean post-graduation pay has to be higher than median pay – and the authors think that this is likely at a selective school where the top students can be very valuable, but less likely for a less-selective school where everyone is clustered closer to average ability. If the average value of a Wharton student is higher than value of the average Wharton student, then making it hard for employers to figure out who is actually valuable will let everyone get paid for the optionality:

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.

So you don't work hard and get outsized pay when you graduate. Someone once described this system of education as being like a Happy Meal - it's not very nutritious, but it tastes good, and there's a prize at the end. Which is basically a good thing for Wharton students.

You know who it is not a good thing for? Wharton professors who are sick of their lazy students coming to class without having done the reading. Gottlieb and Smetters are not thrilled that everyone's more or less pass-failing their classes:

At Wharton, the amount of time spent on academics fell by 22% in the first four years after grade non-disclosure was implemented. Moreover, the pattern of courses waved by students was not affected by the introduction of grade nondisclosure. Therefore, the idea that grade non-disclosure allows students to take more challenging courses cannot account for the trend in average studying effort among MBA students.

But they’ve got a solution, which they came up with when they noticed that only MBAs, not doctors or lawyers, tend to have nondisclosure policies. You or I might conclude that that's because the preference for wages and dislike for studying is uniquely strong among MBAs. Being economists, however, Gottlieb and Smetters look for incentives:

Business schools are unique in that most other professional programs – including medicine, law and accounting – allow for grade disclosure. These other programs, however, also have some uniform certification (medical boards, legal bar, CPA) that is required to practice at the fullest level.

They think those two facts are related. In their model, you don’t want to exert effort to study in school – but if you’ll need to pass a certification exam then studying for class is more valuable, because it prepares you for the exam that you need to study for anyway.

So the solution is clear: create a certification program for MBAs so that they can't practice - um - business, let's say, without passing that exam. Gottlieb and Smetters suggest this as a way to "change the level of effort of the median student," and conclude that "Future work could explore this issue in more detail." I for one look forward to their future work on a certification exam for business school graduates. Maybe it could be the CFA?

Incidentally, in the news-you-can-use category for soon-to-be-recently-ex-junior-bankers, the paper lists the top 50 business schools by average GMAT score, and whether they allow grade disclosure. Slackers may want to consider Michigan, the lowest-GMAT school with nondisclosure; masochists could look into MIT Sloan, the highest-ranked school with grade disclosure.

Grade Non-Disclosure [NBER]

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