(8) Coarse Grades: Informing the Public by Withholding Information, by Rick Harbaugh and Eric Rasmusen
Certifiers of quality often report only coarse grades to the public despite having measured quality more finely, e.g., “Pass” or “Certified” instead of “73 out of 100.” Why? We show that coarse grades result in more information being provided to the public because the coarseness encourages those of middling quality to apply for certification. Dropping exact grading in favor of the best coarse grading scheme reduces public uncertainty because the extra participation outweighs the coarser reporting. In some circumstances, the coarsest meaningful grading scheme, pass-fail grading, results in the most information.
Here is the link to American Economic Journal: Microeconomics. Of course another mechanism favoring coarse grading is that corrupt grades are easier to spot. If too many one-star Michelin restaurants are slid up to three stars, it is obvious something is going on. But if on a scale of one hundred a restaurant that ought to be a 67 is given a 73, who is really to say what those numbers are supposed to mean? There are many market settings where the coarser grading scheme is preferred over the finer alternative.