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Education choice under uncertainty: Implications for public policy

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  • Hogan, Vincent
  • Walker, Ian

Abstract

We analyse how progressive taxation and education subsidies affect schooling decisions when the returns to education are stochastic. We use the theory of real options to solve the problem of education choice in a dynamic stochastic model. We show that education attainment will be an increasing function of the risk associated with education. Furthermore, this result holds regardless of the degree of risk aversion. We also show that progressive taxes will tend to increase education attainment.

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Bibliographic Info

Article provided by Elsevier in its journal Labour Economics.

Volume (Year): 14 (2007)
Issue (Month): 6 (December)
Pages: 894-912

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Handle: RePEc:eee:labeco:v:14:y:2007:i:6:p:894-912

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  1. Harmon, Colm & Hogan, Vincent & Walker, Ian, 2001. "Dispersion in the Economic Return to Schooling," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3037, C.E.P.R. Discussion Papers.
  2. Jacob A. Mincer, 1974. "Introduction to "Schooling, Experience, and Earnings"," NBER Chapters, in: Schooling, Experience, and Earnings, pages 1-4 National Bureau of Economic Research, Inc.
  3. Jeff Dominitz & Charles F. Manski, 1996. "Eliciting Student Expectations of the Returns to Schooling," Journal of Human Resources, University of Wisconsin Press, vol. 31(1), pages 1-26.
  4. James J. Heckman & Lance Lochner & Christopher Taber, 1998. "Tax Policy and Human Capital Formation," NBER Working Papers 6462, National Bureau of Economic Research, Inc.
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  6. Jacob A. Mincer, 1974. "Schooling, Experience, and Earnings," NBER Books, National Bureau of Economic Research, Inc, number minc74-1, October.
  7. Eaton, Jonathan & Rosen, Harvey S, 1980. "Taxation, Human Capital, and Uncertainty," American Economic Review, American Economic Association, American Economic Association, vol. 70(4), pages 705-15, September.
  8. Belzil, Christian & Hansen, Jörgen, 2002. "Earnings Dispersion, Risk Aversion and Education," IZA Discussion Papers 513, Institute for the Study of Labor (IZA).
  9. Altonji, Joseph G, 1993. "The Demand for and Return to Education When Education Outcomes Are Uncertain," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 11(1), pages 48-83, January.
  10. Trostel, Philip A, 1993. "The Effect of Taxation on Human Capital," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 101(2), pages 327-50, April.
  11. Caballero, R.J., 1994. "Explaining Investment Dynamics in U.S. Manufacturing: Generalized (S,s) Approach," Working papers 94-32, Massachusetts Institute of Technology (MIT), Department of Economics.
  12. James J. Heckman & Lance J. Lochner & Petra E. Todd, 2003. "Fifty Years of Mincer Earnings Regressions," NBER Working Papers 9732, National Bureau of Economic Research, Inc.
  13. Kevin Denny & Colm Harmon, 2001. "Testing for sheepskin effects in earnings equations: evidence for five countries," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 8(9), pages 635-637.
  14. Carneiro, Pedro & Hansen, Karsten T. & Heckman, James J., 2003. "Estimating Distributions of Treatment Effects with an Application to the Returns to Schooling and Measurement of the Effects of Uncertainty on College Choice," IZA Discussion Papers 767, Institute for the Study of Labor (IZA).
  15. Hogan, Vincent & Ian Walker, 2002. "Education Choice under Uncertainty," Royal Economic Society Annual Conference 2002, Royal Economic Society 103, Royal Economic Society.
  16. Vincent Hogan & Ian Walker, 2003. "Education Choice under Uncertainty and Public Policy," Working Papers, School Of Economics, University College Dublin 200302, School Of Economics, University College Dublin.
  17. Card, David, 2001. "Estimating the Return to Schooling: Progress on Some Persistent Econometric Problems," Econometrica, Econometric Society, Econometric Society, vol. 69(5), pages 1127-60, September.
  18. Williams, Joseph T, 1979. "Uncertainty and the Accumulation of Human Capital over the Life Cycle," The Journal of Business, University of Chicago Press, vol. 52(4), pages 521-48, October.
  19. Uusitalo, R. & Conneely, K., 1998. "Estimating Heterogeneous Treatment Effects in the Becker Schooling Model," University of Helsinki, Department of Economics, Department of Economics 435, Department of Economics.
  20. Judd, Kenneth L, 1998. "Taxes, Uncertainty, and Human Capital," American Economic Review, American Economic Association, American Economic Association, vol. 88(2), pages 289-92, May.
  21. Pedro Carneiro & Karsten T. Hansen & James J. Heckman, 2003. "Estimating Distributions of Treatment Effects with an Application to the Returns to Schooling and Measurement of the Effects of Uncertainty on College," NBER Working Papers 9546, National Bureau of Economic Research, Inc.
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