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Imperfect information, self-selection and the market for higher education

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Author Info
Tali Regev
Abstract

This paper explores how the steady trends in increasing tuition costs, college enrollment, and the college wage gap might be related to the quality of college graduates. The model shows that the signaling role of education might be an important yet largely neglected ingredient in these recent changes. I develop a special signaling model in which workers of heterogeneous abilities face the same costs, yet a larger proportion of able individuals self-select to attend college since they are more likely to get higher returns. With imperfect information, the skill premium is an outcome which depends on the equilibrium quality of college attendees and nonattendees. Incorporating a production function of college education, I discuss the properties of the college market equilibrium. A skill-biased technical change directly decreases self-selection into college, but the general equilibrium effect may overturn the direct decline, since increased enrollment and rising tuition costs increase self-selection. Higher initial human capital has an external effect on subsequent investment in school: All agents increase their education, and the higher equilibrium tuition costs increase self-selection and the college premium.

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2007-18.

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Date of creation: 2007
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Handle: RePEc:fip:fedfwp:2007-18

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Keywords: College costs Education Higher - Economic aspects

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  8. Chinhui Juhn & Dae Il Kim & Francis Vella, 2005. "The Expansion of College Education in the United States: Is There Evidence of Declining Cohort Quality?," Economic Inquiry, Oxford University Press, vol. 43(2), pages 303-315, April. [Downloadable!] (restricted)
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  11. Orley Ashenfelter & Cecilia Rouse, 1998. "Income, Schooling, And Ability: Evidence From A New Sample Of Identical Twins," The Quarterly Journal of Economics, MIT Press, vol. 113(1), pages 253-284, February. [Downloadable!] (restricted)
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  17. Berman, Eli & Bound, John & Griliches, Zvi, 1994. "Changes in the Demand for Skilled Labor within U.S. Manufacturing: Evidence from the Annual Survey of Manufactures," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 367-97, May. [Downloadable!] (restricted)
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  23. Richard J. Murnane & John B. Willett & Frank Levy, 1995. "The Growing Importance of Cognitive Skills in Wage Determination," NBER Working Papers 5076, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  24. David H. Autor & Lawrence F. Katz & Alan B. Krueger, 1998. "Computing Inequality: Have Computers Changed The Labor Market?," The Quarterly Journal of Economics, MIT Press, vol. 113(4), pages 1169-1213, November. [Downloadable!] (restricted)
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  25. Blackburn, McKinley L & Neumark, David, 1995. "Are OLS Estimates of the Return to Schooling Biased Downward? Another Look," The Review of Economics and Statistics, MIT Press, vol. 77(2), pages 217-30, May. [Downloadable!] (restricted)
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  28. Hendel, Igal & Shapiro, Joel & Willen, Paul, 2005. "Educational opportunity and income inequality," Journal of Public Economics, Elsevier, vol. 89(5-6), pages 841-870, June. [Downloadable!] (restricted)
  29. Griliches, Zvi, 1977. "Estimating the Returns to Schooling: Some Econometric Problems," Econometrica, Econometric Society, vol. 45(1), pages 1-22, January. [Downloadable!] (restricted)
  30. Juhn, Chinhui & Murphy, Kevin M & Pierce, Brooks, 1993. "Wage Inequality and the Rise in Returns to Skill," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 410-42, June. [Downloadable!] (restricted)
  31. Altonji, Joseph G, 1993. "The Demand for and Return to Education When Education Outcomes Are Uncertain," Journal of Labor Economics, University of Chicago Press, vol. 11(1), pages 48-83, January. [Downloadable!] (restricted)
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  32. Spence, A Michael, 1973. "Job Market Signaling," The Quarterly Journal of Economics, MIT Press, vol. 87(3), pages 355-74, August. [Downloadable!] (restricted)
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