Abstract
In the framework of static mechanism design games with costless non-pecuniary rewards, we solve for optimal student grading standards and attempt to explain the observed mismatch between students.grades and their abilities. The model predicts that the lower the expectations the teacher holds about her students. abilities, the more lenient the grading standards she should set up. Generally, the .no distortion at the top.property does not hold for optimal contracts with costless rewards. As a result, we also argue that the compression of ratings witnessed in job performance appraisals could be an equilibrium outcome. The theoretical .ndings presented herein are strongly supported by empirical evidence from related literature in psychological and educational measurement.