The paper extends the literature on education production functions by arguing that incentives partly determine student performance. The paper develops a model in which schools' grading standards influence student effort. The model is tested using the Longitudinal Study of American Youth (LSAY). The level of grading standards at each school is a highly significant predictor of gains in student test scores, more so than are standard measures of school resources. Amount of homework performed by students also responds to grading standards. The paper concludes that higher grading standards represent an important tool for improving school quality.