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An Empirical Investigation of the Option Value of College Enrollment

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  • Kevin M. Stange
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    Abstract

    This paper quantifies the option value arising from sequential schooling decisions made in the presence of uncertainty and learning about academic ability. College attendance has option value since enrolled students have the option, but not obligation, to continue in school after learning their aptitude and tastes. I estimate that option value accounts for 14 percent of the total value of the opportunity to attend college for the average high school graduate and is greatest for moderate-aptitude students. Students' ability to make decisions sequentially in response to new information increases welfare and also makes educational outcomes less polarized by background. (JEL D83, I23)

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    Bibliographic Info

    Article provided by American Economic Association in its journal American Economic Journal: Applied Economics.

    Volume (Year): 4 (2012)
    Issue (Month): 1 (January)
    Pages: 49-84

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    Handle: RePEc:aea:aejapp:v:4:y:2012:i:1:p:49-84

    Note: DOI: 10.1257/app.4.1.49
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    1. James J. Heckman & Salvador Navarro, 2005. "Dynamic Discrete Choice and Dynamic Treatment Effects," NBER Technical Working Papers 0316, National Bureau of Economic Research, Inc.
    2. Philip Oreopoulos & Till von Wachter & Andrew Heisz, 2006. "The Short- and Long-Term Career Effects of Graduating in a Recession: Hysteresis and Heterogeneity in the Market for College Graduates," NBER Working Papers 12159, National Bureau of Economic Research, Inc.
    3. Courtney Coile & Jonathan Gruber, 2007. "Future Social Security Entitlements and the Retirement Decision," The Review of Economics and Statistics, MIT Press, vol. 89(2), pages 234-246, May.
    4. Heckman, James & Singer, Burton, 1984. "A Method for Minimizing the Impact of Distributional Assumptions in Econometric Models for Duration Data," Econometrica, Econometric Society, vol. 52(2), pages 271-320, March.
    5. Kane, Thomas J & Rouse, Cecilia Elena, 1995. "Labor-Market Returns to Two- and Four-Year College," American Economic Review, American Economic Association, vol. 85(3), pages 600-614, June.
    6. Stacey H. Chen, 2008. "Estimating the Variance of Wages in the Presence of Selection and Unobserved Heterogeneity," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 275-289, May.
    7. Burton A. Weisbrod, 1962. "Education and Investment in Human Capital," Journal of Political Economy, University of Chicago Press, vol. 70, pages 106.
    8. Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September.
    9. Taber, Christopher R., 2000. "Semiparametric identification and heterogeneity in discrete choice dynamic programming models," Journal of Econometrics, Elsevier, vol. 96(2), pages 201-229, June.
    10. Dothan, Uri & Williams, Joseph, 1981. "Education as an Option," The Journal of Business, University of Chicago Press, vol. 54(1), pages 117-39, January.
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    Cited by:
    1. Jepsen, Christopher & Troske, Kenneth & Coomes, Paul A., 2012. "The Labor-Market Returns to Community College Degrees, Diplomas, and Certificates," IZA Discussion Papers 6902, Institute for the Study of Labor (IZA).
    2. Sarena F. Goodman, 2013. "Learning from the test: raising selective college enrollment by providing information," Finance and Economics Discussion Series 2013-69, Board of Governors of the Federal Reserve System (U.S.).
    3. Andrew T. Ching & Tülin Erdem & Michael P. Keane, 2013. "Learning Models: An Assessment of Progress, Challenges and New Developments," Economics Papers 2013-W07, Economics Group, Nuffield College, University of Oxford.

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