ad hoc explanations cannot be ruled out, or in, by the analysis that follows. The purpose here, instead, is to propose an alternative explanation derived from economic theory and a few observations regarding the contrasting ways in which learning achievement is measured and then signaled to parents, school administrators, colleges, and employers in the five countries. The third section also shows how signaling theory, game theory, and agency theory provide a robust explanation of the learning deficits in American upper secondary schools.

According to the economic theory developed below, the fundamental cause is the structure of incentives for learning and high-quality teaching of demanding material. American employers reward credentials, but they fail to recognize and reward what is actually learned in school. Admission to the best colleges depends on measures of relative performance—rank in class and grades—and aptitude tests that do not assess what is taught in school, not external assessments of competence in particular subjects. Only one of the 50 states has a system of subject-specific external exams similar to the Baccalaureat (Bac), the General Certificate of Secondary Education (GCSE), and the Dutch exams. The result has been grade inflation and students selecting undemanding courses where it is easy to get a high grade. Students pressure each other not to study, in part because they are being graded on a curve. Teachers are pressured to keep failure rates low, so passing standards are effectively forced down by peer pressure against studying. The final section of this chapter summarizes the analysis and comments on the implications for economic analysis of education policy.

Differentials in Academic Achievement

The differences in achievement levels at ages 13, 14, and 15 are summarized in Table 7.1. The table presents data from studies conducted in the 1980s and 1990s comparing France, the Netherlands, England, Scotland, and the United States. The International Association for the Evaluation of Educational Achievements (IAEEA) studies sampled students at particular grade levels, not at particular ages. Consequently, age-adjusted scores on its tests are reported where possible and information on the age of the sample is provided in the footnotes of the table.

Reading. In the 1990–1991 IAEEA study of reading, age-adjusted scores indicated that American 9 year olds (see column 1 of Table 7.1) were reading about 58 percent of a U.S. standard deviation (SD) better than Dutch 9 year olds and about .20 SDs better than French 9 year olds. However, by age 14, differences between the countries (column 2) were tiny.

Mathematics. In the 1981–1982 study of mathematics achievement of 13 to 14 year olds conducted by the IAEEA, Dutch and French 13 to 14 year olds ranked second and third, respectively, behind only Japan. Of the 17 industrialized nations participating in the study of 13 to 14 year olds, Americans were



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