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The Demand for and Return to Education When Education Outcomes are Uncertain

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  • Joseph G. Altonji

Abstract

The vast literature on human capital and earnings assumes that individuals know in advance that they will complete a particular program of schooling. This paper treats education as a sequential choice that is made under uncertainty. A simple two period structural model is used to explore the effects of ability, high school preparation, preferences for schooling, the borrowing rate, and ex post payoffs to college on the probability of various post secondary college outcomes and the ex ante return to starting college. The model provides the basis for a simple empirical method of accounting for uncertainty about educational outcomes and for nonlinearity in the relationship between years of education and earnings when estimating the expected return to the first year of college. I present estimates of the effects of gender, aptitude, high school curriculum, family background characteristics, and other variables on the expected return to starting college.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3714.

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Date of creation: May 1991
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Publication status: published as Journal of Labor Economics,11, no. 1, Part 1, January 1993, p. 48-83
Handle: RePEc:nbr:nberwo:3714

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  1. Sicherman, Nachum & Galor, Oded, 1990. "A Theory of Career Mobility," Journal of Political Economy, University of Chicago Press, vol. 98(1), pages 169-92, February.
  2. David Card & Alan Krueger, 1990. "Does School Quality Matter? Returns to Education and the Characteristics of Public Schools in the United States," NBER Working Papers 3358, National Bureau of Economic Research, Inc.
  3. Lang, Kevin & Kropp, David, 1986. "Human Capital versus Sorting: The Effects of Compulsory Attendance Laws," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 609-24, August.
  4. Polachek, Solomon William, 1981. "Occupational Self-Selection: A Human Capital Approach to Sex Differences in Occupational Structure," The Review of Economics and Statistics, MIT Press, vol. 63(1), pages 60-69, February.
  5. Miller, Robert A, 1984. "Job Matching and Occupational Choice," Journal of Political Economy, University of Chicago Press, vol. 92(6), pages 1086-120, December.
  6. Kathryn L. Shaw, 1985. "Occupational change, employer change, and the transferability of skills," Working Paper Series / Economic Activity Section 55, Board of Governors of the Federal Reserve System (U.S.).
  7. Comay, Yochanan & Melnik, A & Pollatschek, M A, 1973. "The Option Value of Education and the Optimal Path for Investment in Human Capital," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(2), pages 421-35, June.
  8. Murphy, Kevin M & Welch, Finis, 1992. "The Structure of Wages," The Quarterly Journal of Economics, MIT Press, vol. 107(1), pages 285-326, February.
  9. Mark C. Berger, 1988. "Predicted future earnings and choice of college major," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 41(3), pages 418-429, April.
  10. repec:fth:prinin:265 is not listed on IDEAS
  11. Hungerford, Thomas & Solon, Gary, 1987. "Sheepskin Effects in the Returns to Education," The Review of Economics and Statistics, MIT Press, vol. 69(1), pages 175-77, February.
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