Several papers have proposed that the grading system affects students’ incentives to exert effort. In particular, the previous literature has compared student effort under relative and absolute grading systems, but the results are mixed and the implications of the models have not been empirically tested. In this paper, I build a model where students maximize their utility by choosing effort. I investigate how student effort changes when there is a change in the grading system from absolute grading to relative grading. I use a unique dataset from college students in Chile who faced a change in the grading system to test the implications of my model. My model predicts that, for low levels of uncertainty, low-ability students exert less effort with absolute grading, and high-ability students exert more effort with absolute grading. The data confirm that there is a change in the distribution of effort.

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