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On the Distribution of College Dropouts: Wealth and Uninsurable Idiosyncratic Risk

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Author Info

  • Ali K. Ozdagli

    (Federal Reserve Bank of Boston)

  • Nicholas Trachter

    (EIEF)

Abstract

We present a dynamic model of college education where the students face uncertainty about their income stream after graduation due to unobserved heterogeneity in their innate scholastic ability. As students write exams, they reevaluate their expectations and may find it optimal to drop out and join the workforce without reaping the whole benefit of college education. The model shows that, in accordance with the data, poorer students are less likely to graduate and are more likely to drop out earlier than wealthier students. Our model generates these results without introducing credit constraints. Conditioning on measures of innate ability, we find in the data that poor students are at least 31% more likely to drop and they do so around a year before rich students.

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Bibliographic Info

Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 1105.

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Length: 29 pages
Date of creation: 2011
Date of revision: Mar 2011
Handle: RePEc:eie:wpaper:1105

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