Sorting and Grading

We propose a framework to assess how to optimally sort and grade students of heterogenous ability. Potential employers face uncertainty regarding an individual's productive value. Knowing which school an individual went to is useful for two reasons: firstly, average student ability may differ across schools; secondly, different schools may use different grading rules and thus provide varying incentives to exert effort. An optimal school system exhibits coarse stratification with respect to ability, and more lenient grading at the top-tier schools than at the bottom-tier schools. Our paper contributes to the ongoing policy debate on tracking in secondary schools.