Grades as Signals of Comparative Advantage : How Letter Grades Affect Major Choices

Do letter grades in introductory courses affect students’ choice of major; if so, why and what are the consequences on labor market outcomes? We focus on social science and humanities students at the National University of Singapore, who are required to take introductory courses in multiple disciplines before declaring a major. Students observe their letter grades, but not the underlying numerical scores. Using a regression discontinuity design, we find that major choices are sensitive to introductory course grades: students just above a letter-grade cutoff are 3.6 percent (1.56 percentage points) more likely to major in the same field as the introductory course. We build a simple model of major choice where letter grades act as signals of field-specific ability, thereby affecting students’ expectations of future GPA and income. The model predicts higher grade sensitivity in fields with higher income-GPA gradients and lower pre-university exposure. We find support for this model. We also study the effects of letter grades on subsequent course-taking and labor market outcomes