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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. 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.
    2. James J. Heckman & Salvador Navarro, 2005. "Dynamic Discrete Choice and Dynamic Treatment Effects," NBER Technical Working Papers 0316, National Bureau of Economic Research, Inc.
    3. Taber, Christopher R., 2000. "Semiparametric identification and heterogeneity in discrete choice dynamic programming models," Journal of Econometrics, Elsevier, Elsevier, vol. 96(2), pages 201-229, June.
    4. Dothan, Uri & Williams, Joseph, 1981. "Education as an Option," The Journal of Business, University of Chicago Press, vol. 54(1), pages 117-39, January.
    5. Heckman, James & Singer, Burton, 1984. "A Method for Minimizing the Impact of Distributional Assumptions in Econometric Models for Duration Data," Econometrica, Econometric Society, Econometric Society, vol. 52(2), pages 271-320, March.
    6. 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.
    7. 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.
    8. Kane, Thomas J & Rouse, Cecilia Elena, 1995. "Labor-Market Returns to Two- and Four-Year College," American Economic Review, American Economic Association, American Economic Association, vol. 85(3), pages 600-614, June.
    9. Comay, Yochanan & Melnik, A & Pollatschek, M A, 1973. "The Option Value of Education and the Optimal Path for Investment in Human Capital," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(2), pages 421-35, June.
    10. Burton A. Weisbrod, 1962. "Education and Investment in Human Capital," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 70, pages 106.
    11. Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, Econometric Society, vol. 55(5), pages 999-1033, September.
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    Cited by:
    1. Christopher Jepsen & Kenneth Troske & Paul Coomes, 2012. "The Labor-Market Returns to Community College Degrees, Diplomas, and Certificates," Working Papers, School Of Economics, University College Dublin 201223, School Of Economics, University College Dublin.
    2. Sarena F. Goodman, 2013. "Learning from the test: raising selective college enrollment by providing information," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 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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