Question

Many colleges offer pass/fail classes. Use the economic concepts of adverse selection and moral hazard to explain what may be the potential drawbacks or shortcomings of utilizing such a grading system

Answer 1

Adverse selection and moral hazard are both outcomes of asymmetric information . Grading system usually have such asymmetric information . A student who passes with 90% and a student who passes with 50% both receive the same grade " Pass " . Teachers or people hiring these students would not know the actual capability of a student due to this grading system . This is the problem of adverse selection .

Also students take advantage of such a system and usually study less or do not cover the entire syllabus since the student knows that even after scoring poor marks he would get a " Pass " grade if he achieves the pass criteria . So this is the problem of moral hazard .