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Real options and human capital investment

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  • Jacobs, Bas

Abstract

This paper extends the standard human capital model with real options. Real options influence investment behavior when risky investments in human capital are irreversible and individuals can affect the timing of the investment. Option values make individuals more reluctant to invest in human capital and, as a result, required returns on the investment increase. Real options may help to explain a larger human capital premium for higher education, smaller responsiveness of higher education investments to financial incentives, and larger sensitivity of higher education to low-return outcomes and human capital risks. Higher tax rates (or lower subsidies) depress human capital investments, but to a lesser extent than in the standard human capital model. A flat income tax remains neutral if education expenditures are fully deductible.

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Bibliographic Info

Article provided by Elsevier in its journal Labour Economics.

Volume (Year): 14 (2007)
Issue (Month): 6 (December)
Pages: 913-925

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Handle: RePEc:eee:labeco:v:14:y:2007:i:6:p:913-925

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Web page: http://www.elsevier.com/locate/labeco

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References

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Citations

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Cited by:
  1. Torberg Falch & Justina A.V. Fischer, 2008. "Does a Generous Welfare State Crowd out Student Achievement? Panel Data Evidence from International Student Tests," CESifo Working Paper Series 2383, CESifo Group Munich.
  2. J. Atsu Amegashie & Bazoumana Ouattara & Eric Strobl, 2007. "Moral Hazard and the Composition of Transfers: Theory with an Application to Foreign Aid," Working Papers 0702, University of Guelph, Department of Economics and Finance.
  3. Anna Zaharieva, 2013. "On-the-job search and optimal schooling under uncertainty and irreversibility," Working Papers 492, Bielefeld University, Center for Mathematical Economics.
  4. Bas Jacobs, 2008. "Is Prescott Right? Welfare State Policies and the Incentives to Work, Learn and Retire," CESifo Working Paper Series 2277, CESifo Group Munich.
  5. Lopez, Ramon, 2009. "Natural disasters and the dynamics of intangible assets," Policy Research Working Paper Series 4874, The World Bank.
  6. Falch, Torberg & Fischer, Justina AV, 2011. "Welfare state generosity and student performance: Evidence from international student tests," MPRA Paper 35269, University Library of Munich, Germany.
  7. Gries, Thomas & Naude, Wim, 2009. "When to Start a New Firm?: Modelling the Timing of Novice and Serial Entrepreneurs," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  8. repec:pdn:wpaper:10 is not listed on IDEAS
  9. Justina Fischer & Torberg Falch, 2008. "Does a generous welfare state crowd out student effort? Panel data evidence from international student tests," TWI Research Paper Series 25, Thurgauer Wirtschaftsinstitut, Universität Konstanz.
  10. Bilkic, N. & Gries, T. & Pilichowski, M., 2012. "Stay in school or start working? — The human capital investment decision under uncertainty and irreversibility," Labour Economics, Elsevier, vol. 19(5), pages 706-717.
  11. Hwang, Wei-Yei & Liao, Shu-Yi & Huang, Mao-Lung, 2013. "Real option, human capital investment returns and higher educational policy," Economic Modelling, Elsevier, vol. 31(C), pages 447-452.
  12. Fernandes, Rui & Gouveia, Borges & Pinho, Carlos, 2013. "A real options approach to labour shifts planning under different service level targets," European Journal of Operational Research, Elsevier, vol. 231(1), pages 182-189.
  13. Mitchell, Paul D. & Rejesus, Roderick M. & Coble, Keith H. & Knight, Thomas O., 2010. "A Real Options Framework for Analyzing Program Participation as Human Capital Investments: The Case of the Average Crop Revenue Election (ACRE) Program," Staff Paper Series 547, University of Wisconsin, Agricultural and Applied Economics.

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