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Family Background and Optimal Schooling Decisions

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  • Lazear, Edward P

Abstract

In this paper, another aspect of optimizing behavior is considered. Specifically, it asks whether variations in levels of attained schooling across groups can be explained by a model that assumes that capital markets are perfect and that individuals maximize wealth. The logic of the analysis proceeds as follows: First, a model is constructed that allows estimation of costs and returns to education for each individual, based on the assumption that all individuals face the same borrowing rates. Given costs and returns, one can obtain an optimal wealth-maximizing level of education for each individual. Differences between actually acquired and wealth-maximizing levels of education can then be calculated, and one can determine whether or not the residuals are systematically related to background variables. If, for example, low-income individuals have a consistently larger estimated wealth-maximizing level of education than actual level, one could conclude either that returns to schooling differed between groups or that capital market differences exist. The model allows these two explanations to be distinguished. Since differential returns are caused by wage differences across groups, the wealth-maximizing level can take these labor market variations into account. Any residual variation will be due to factors other than differential wage rates, presumably capital cost differences .

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Bibliographic Info

Article provided by MIT Press in its journal Review of Economics & Statistics.

Volume (Year): 62 (1980)
Issue (Month): 1 (February)
Pages: 42-51

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Handle: RePEc:tpr:restat:v:62:y:1980:i:1:p:42-51

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Web page: http://mitpress.mit.edu/journals/

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References

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  1. Griliches, Zvi, 1976. "Wages of Very Young Men," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages S69-85, August.
  2. Bowles, Samuel, 1972. "Schooling and Inequality from Generation to Generation," Journal of Political Economy, University of Chicago Press, vol. 80(3), pages S219-S51, Part II, .
  3. Lazear, Edward P, 1976. "Age, Experience, and Wage Growth," American Economic Review, American Economic Association, vol. 66(4), pages 548-58, September.
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Cited by:
  1. Mohamed Ben Mimoun, 2004. "Redistribution Through Education and Other Mechanisms Under. Capital-Market Imperfections and Uncertainty : A Welfare Effect Analysis," Cahiers de la Maison des Sciences Economiques bla04110, Université Panthéon-Sorbonne (Paris 1).
  2. Asli Demirg��-Kunt & Ross Levine, 2009. "Finance and Inequality: Theory and Evidence," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 287-318, November.
  3. El-Osta, Hisham S., 2011. "The Impact of Human Capital on Farm Operator Household Income," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 40(1), April.
  4. John Fender & Ping Wang, 2001. "Educational Policy in a Credit Constrained Economy with Skill Heterogeneity," Vanderbilt University Department of Economics Working Papers 0133, Vanderbilt University Department of Economics.
  5. Been-Lon Chen & Yeong-Yuh Chiang & Ping Wang, 2000. "Credit Market Imperfections, Financial Activity and Economic Growth," Vanderbilt University Department of Economics Working Papers 0020, Vanderbilt University Department of Economics.
  6. John Fender & Ping Wang, 2000. "Educational Policy and Skill Heterogeneity with Credit Market Imperfections," Vanderbilt University Department of Economics Working Papers 0021, Vanderbilt University Department of Economics.
  7. Sedlacek, Guilherme & Costa, Daniela Ribeiro da & Carvalho, Alexandre Pinto de & Gustafsson-Wright, Emily & Neri, Marcelo Cortes, 2000. "Microeconomic Instability and Children's Human Capital Accumulation: The Effects of Idiosyncratic Shocks to Father's Income on Child Labor, School Drop-Outs and Repetition Rates in Brazil," Economics Working Papers (Ensaios Economicos da EPGE) 394, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  8. Suzanne Duryea, 1998. "El avance de los niños a lo largo del sistema educativo en Brasil: el papel de las sacudidas transitorias del ingreso familiar," Research Department Publications 4125, Inter-American Development Bank, Research Department.
  9. Belzil, Christian & Hansen, Jörgen, 1999. "Subjective Discount Rates, Intergenerational Transfers and the Return to Schooling," IZA Discussion Papers 60, Institute for the Study of Labor (IZA).
  10. Charles M. Beach & Ross E. Finnie, 1988. "Family Background in an Extended Earnings-Generation Model: Further Evidence," Eastern Economic Journal, Eastern Economic Association, vol. 14(1), pages 39-49, Jan-Mar.
  11. Suzanne Duryea, 1998. "Children's Advancement Through School in Brazil: The Role of Transitory Shocks to Household Income," Research Department Publications 4124, Inter-American Development Bank, Research Department.
  12. Christian Belzil & Jörgen Hansen, 2001. "Estimating the Intergenerational Education Correlation from a Dynamic Programming Model," CIRANO Working Papers 2001s-20, CIRANO.
  13. Michael J. Boskin & Eytan Sheshinski, 1976. "Optimal Income Redistribution When Individual Welfare Depends Upon Relative Income," NBER Working Papers 0144, National Bureau of Economic Research, Inc.

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