Management by results: Student evaluation of faculty teaching and the mis-measurement of performance

Using data on 4 years of courses at American University, regression results show that actual grades have a significant, positive effect on student evaluations of teaching (SETs), controlling for expected grade and fixed effects for both faculty and courses, and for possible endogeneity. Implications are that the SET is a faulty measure of teaching quality and grades a faulty signal of future job performance. Students, faculty, and provost appear to be engaged in an individually rational but socially destructive game of grade inflation centered on the link between SETs and grades. When performance is hard to measure, pay-for-performance, embodied by the link between SETs and faculty pay, may have unintended adverse consequences.