College Risk and Return
AbstractAttending college is thought of as a very profitable investment decision, as its estimated annualized return ranges from 8% to 13%. However, a large fraction of high school graduates do not enroll in college. I reconcile the observed high average returns to schooling with relatively low attendance rates when considering college as a risky investment decision. A high dropout risk has two important effects on the estimated average returns to college: selection bias and risk premium. In order to explicitly consider the selection bias, I explore the dropout risk in a life-cycle model with heterogeneous ability. The risk-premium of college participation accounts for 21% of the excess returns to college education for highability students and 19% of the excess return for low-ability students. Risk averse agents are willing to reduce their return to college in order to avoid the dropout risk. The effect is not uniform across ability levels.
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Bibliographic InfoPaper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 606.
Date of creation: Jan 2011
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-04-23 (All new papers)
- NEP-EDU-2011-04-23 (Education)
- NEP-LAB-2011-04-23 (Labour Economics)
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