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Subjective Beliefs and Schooling Decisions

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  • Belzil, Christian

    () (Ecole Polytechnique, Paris)

Abstract

This paper considers the estimation of sequential schooling decisions made by agents who are endowed with subjective beliefs about their own ability. I use unique Italian panel data which provide information on i) the curvature of the per-period utility function, ii) schooling decisions, iii) post-schooling earnings, in order to estimate the future component of the differences in intertemporal utilities of school and work independently from the present component, (as in Geweke and Keane, 1995, 2001), and evaluate the importance of “present bias”. Under certain conditions, which include imposing equality between the modal belief and true ability, I recover individual specific subjective probability distributions. I estimate both the degree of confidence (a measure of spread) and the incidence of over (and under) estimation. I find that the future component of intertemporal utilities dominates schooling decisions. I find a strong incidence of under-estimation among the more able and a much smaller incidence of over-estimation among the low ability group. At the medium ability spectrum, there is evidence of some over-estimation. The degree of confidence is high and implies that agents have a substantial amount of inside information (36% of the population act on a degenerate subjective distribution). Overall, the variance of the objective ability heterogeneity distribution is 4 times as large the variance of the distribution characterizing subjective beliefs.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2820.

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Length: 47 pages
Date of creation: May 2007
Date of revision:
Handle: RePEc:iza:izadps:dp2820

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Keywords: dynamic programming; schooling; rational expectation; expectation parameterization; subjective distributions; present bias; over-confidence;

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References

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  1. Christian Belzil, 2006. "The Return to Schooling in Structural Dynamic Models: A Survey," Working Papers 0609, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  2. Miller, Robert A, 1984. "Job Matching and Occupational Choice," Journal of Political Economy, University of Chicago Press, vol. 92(6), pages 1086-120, December.
  3. Cunha, Flavio & Heckman, James, 2008. "A New Framework For The Analysis Of Inequality," Macroeconomic Dynamics, Cambridge University Press, vol. 12(S2), pages 315-354, September.
  4. Christian Belzil & Jörgen Hansen, 2007. "A Structural Analysis of the Correlated Random Coefficient Wage Regression Model," Post-Print halshs-00201350, HAL.
  5. Luigi Guiso & Monica Paiella, 2005. "The Role Of Risk Aversion In Predicting Individual Behavior," Temi di discussione (Economic working papers) 546, Bank of Italy, Economic Research and International Relations Area.
  6. Flinn, Christopher J, 2002. "Labour Market Structure and Inequality: A Comparison of Italy and the U.S," Review of Economic Studies, Wiley Blackwell, vol. 69(3), pages 611-45, July.
  7. Daniel Houser & Michael Keane & Kevin McCabe, 2004. "Behavior in a Dynamic Decision Problem: An Analysis of Experimental Evidence Using a Bayesian Type Classification Algorithm," Econometrica, Econometric Society, vol. 72(3), pages 781-822, 05.
  8. Bellemare, C. & Kroger, S. & Soest, A.H.O. van, 2005. "Actions and Beliefs: Estimating Distribution-Based Preferences Using a Large Scale Experiment with Probability Questions on Expectations," Discussion Paper 2005-82, Tilburg University, Center for Economic Research.
  9. Flavio Cunha & James Heckman & Salvador Navarro, 2005. "Separating uncertainty from heterogeneity in life cycle earnings," Oxford Economic Papers, Oxford University Press, vol. 57(2), pages 191-261, April.
  10. Guiso, Luigi & Jappelli, Tullio & Pistaferri, Luigi, 2002. "An Empirical Analysis of Earnings and Employment Risk," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 241-53, April.
  11. Christian Belzil & Marco Leonardi, 2009. "Risk aversion and schooling decisions," Working Papers hal-00411099, HAL.
  12. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 972-90, October.
  13. James J. Heckman & Salvador Navarro, 2005. "Dynamic Discrete Choice and Dynamic Treatment Effects," NBER Technical Working Papers 0316, National Bureau of Economic Research, Inc.
  14. Monica Paiella & Luigi Guiso, 2004. "Risk Aversion, Wealth and Background Risk," 2004 Meeting Papers 525, Society for Economic Dynamics.
  15. Christian Gollier, 2004. "The Economics of Risk and Time," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572249.
  16. Ariel Rubinstein, 2005. "Discussion of 'BEHAVIORAL ECONOMICS'," Levine's Bibliography 784828000000000539, UCLA Department of Economics.
  17. repec:feb:artefa:0006 is not listed on IDEAS
  18. Dan Lovallo & Colin Camerer, 1999. "Overconfidence and Excess Entry: An Experimental Approach," American Economic Review, American Economic Association, vol. 89(1), pages 306-318, March.
  19. Zvi Eckstein & Kenneth I. Wolpin, 1999. "Why Youths Drop Out of High School: The Impact of Preferences, Opportunities, and Abilities," Econometrica, Econometric Society, vol. 67(6), pages 1295-1340, November.
  20. Keane, Michael P & Wolpin, Kenneth I, 1997. "The Career Decisions of Young Men," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 473-522, June.
  21. Charles Bellemare & Sabine Kroger & Arthur van Soest, 2005. "Actions and beliefs: Estimating distribution-based preferences using a large scale experiment with probability questions on expectations," Artefactual Field Experiments 00007, The Field Experiments Website.
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Citations

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Cited by:
  1. Antonio Filippin & Marco Paccagnella, 2012. "Family background, self-confidence and economic outcomes," Temi di discussione (Economic working papers) 875, Bank of Italy, Economic Research and International Relations Area.
  2. Christian Belzil & Marco Leonardi, 2007. "Can Risk Aversion Explain Schooling Attainments?: evidence from Italy," Post-Print halshs-00201351, HAL.
  3. Belzil, Christian & Leonardi, Marco, 2007. "Risk Aversion and Schooling Decisions," IZA Discussion Papers 2994, Institute for the Study of Labor (IZA).
  4. Christian Belzil, 2006. "The Return to Schooling in Structural Dynamic Models: A Survey," Post-Print halshs-00142538, HAL.
  5. Heineck, Guido & Wölfel, Oliver, 2010. "Parental risk attitudes and children's secondary school track choice," IAB Discussion Paper 201019, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].

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