Measuring the option value of education
AbstractMany recent descriptive studies find convex schooling-earnings profiles in developing countries. In these countries forward-looking students should attach option values to completing lower levels of schooling. Another option value may arise due to the uncertain economic environment in which the sequence of enrolment decisions is made. Most theoretical models that are used to motivate and interpret OLS or IV estimates of the returns to schooling assume away convexity in the schooling-earnings profile, uncertainty and the inherently dynamic nature of schooling investment decisions. This paper develops a decomposition technique that calculates the relative importance of different benefits of completing additional schooling years, including the option values associated with convex schooling returns and uncertainty. These components are then estimated on a sample of workers who has revealed a highly convex schooling-earnings profile, and who face considerable uncertainty regarding future wage offers: young black South African men. We find that rationalising the observed school enrolment decisions requires large option values of early schooling levels (mainly associated with convexity rather than uncertainty), as well as a schooling cost function that increases steeply between schooling phases.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Centre for the Study of African Economies, University of Oxford in its series CSAE Working Paper Series with number 2013-13.
Date of creation: 2013
Date of revision:
Other versions of this item:
- C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
- J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
- J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Christian Belzil & Jörgen Hansen, 2002.
"Unobserved Ability and the Return to Schooling,"
CIRANO Working Papers
- Siphambe, Happy Kufigwa, 2000. "Rates of return to education in Botswana," Economics of Education Review, Elsevier, vol. 19(3), pages 291-300, June.
- Simon Appleton & John Hoddinott & John MacKinnon, 1996. "Education and health in sub-Saharan Africa," Journal of International Development, John Wiley & Sons, Ltd., vol. 8(3), pages 307-339.
- repec:fth:coluec:9596-13 is not listed on IDEAS
- James J. Heckman & Lance J. Lochner & Petra E. Todd, 2008.
"Earnings Functions And Rates Of Return,"
200831, Geary Institute, University College Dublin.
- James J. Heckman & Lance J. Lochner & Petra E. Todd, 2008. "Earnings Functions and Rates of Return," University of Western Ontario, CIBC Centre for Human Capital and Productivity Working Papers 20082, University of Western Ontario, CIBC Centre for Human Capital and Productivity.
- James J. Heckman & Lance J. Lochner & Petra E. Todd, 2008. "Earnings Functions and Rates of Return," NBER Working Papers 13780, National Bureau of Economic Research, Inc.
- Heckman, James J. & Lochner, Lance & Todd, Petra E., 2008. "Earnings Functions and Rates of Return," IZA Discussion Papers 3310, Institute for the Study of Labor (IZA).
- James J. Heckman, 2010.
"Building Bridges between Structural and Program Evaluation Approaches to Evaluating Policy,"
Journal of Economic Literature,
American Economic Association, vol. 48(2), pages 356-98, June.
- James J. Heckman, 2010. "Building Bridges Between Structural and Program Evaluation Approaches to Evaluating Policy," NBER Working Papers 16110, National Bureau of Economic Research, Inc.
- Malcolm Keswell & Laura Poswell, 2004. "Returns To Education In South Africa: A Retrospective Sensitivity Analysis Of The Available Evidence," South African Journal of Economics, Economic Society of South Africa, vol. 72(4), pages 834-860, 09.
- Jacob A. Mincer, 1974. "Schooling, Experience, and Earnings," NBER Books, National Bureau of Economic Research, Inc, number minc74-1.
- Francis Teal, 2001. "Education, incomes, poverty and inequality in Ghana in the 1990s," Economics Series Working Papers WPS/2001-21, University of Oxford, Department of Economics.
- Francis Teal, 2004.
"Education, incomes, poverty and inequality in Ghana in the 1990s,"
Development and Comp Systems
- Francis Teal, 2001. "Education, incomes, poverty and inequality in Ghana in the 1990s," CSAE Working Paper Series 2001-21, Centre for the Study of African Economies, University of Oxford.
- 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.
- Jacob Mincer, 1996. "Changes in Wage Inequality, 1970-1990," NBER Working Papers 5823, National Bureau of Economic Research, Inc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Richard Payne).
If references are entirely missing, you can add them using this form.