A for effort: an empirical analysis of the effect of competition on grade inflation in Swedish schools

I present a theoretical model for competitive interaction between schools and grade inflation. To test the model, I estimate the effect of competition on grade inflation in Swedish upper secondary schools using data from all schools in the years 2012-2015. To solve the endogeneity problem of competition, I use Instrumental Variable estimation with Fixed Effects. I use the sudden shutdown of 17 schools due to the bankruptcy of the John Bauer Group in 2013 as an instrument for competition. The IV results and the exploration of an adverse effect of grade inflation both support the theoretical model. The IV results show that there is a causal effect of competition on grade inflation