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The Return to College: Selection Bias and Dropout Risk

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  • Oksana Leukhina

    (University of Washington)

  • Lutz A. Hendricks

    (University of North Carolina at Chapel Hill)

Abstract

We study two long-standing questions: (i) What part of the measured return to education is due to selection? (ii) The ex post return to schooling is higher than the return to most financial assets. How large are the contributions of various frictions to the "high" return to schooling? We focus in particular on the roles of college dropout risk, borrowing constraints, and learning about ability. We develop and calibrate a model of school choice. Key model features are: (i) ability heterogeneity, (ii) students learn about their abilities while in college, (iii) borrowing constraints, (iv) dropping out of college is a choice. We find that the probability of graduating from college increases strongly with ability. Most college dropouts are students of intermediate abilities who try college in part to learn about their abilities and in part because of the option value of receiving a large earnings gain upon graduation. Ability selection accounts for about 40% of the measured college wage premium.

Suggested Citation

  • Oksana Leukhina & Lutz A. Hendricks, 2011. "The Return to College: Selection Bias and Dropout Risk," 2011 Meeting Papers 311, Society for Economic Dynamics.
    • Handle: RePEc:red:sed011:311
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    References listed on IDEAS

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    Cited by:

    1. Gonzalo Castex, 2017. "College risk and return," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 91-112, October.
    2. Kartik B. Athreya & Janice Eberly, 2013. "The supply of college-educated workers: the roles of college premia, college costs, and risk," Working Paper 13-02, Federal Reserve Bank of Richmond.
    3. Lutz Hendricks & Oksana Leukhina, 2017. "How Risky is College Investment?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 140-163, October.
    4. Kartik B. Athreya & Jessica Sackett Romero, 2015. "Land of Opportunity: Economic Mobility in the United States," Economic Quarterly, Federal Reserve Bank of Richmond, issue 2Q, pages 169-191.
    5. Kartik B. Athreya & Felicia Ionescu & Urvi Neelakantan & Ivan Vidangos, 2020. "Who Values Access to College?," Richmond Fed Economic Brief, Federal Reserve Bank of Richmond, issue 20-03, pages 1-5, March.
    6. Kevin Donovan & Christopher Herrington, 2019. "Factors Affecting College Attainment and Student Ability in the U.S. since 1900," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 31, pages 224-244, January.
    7. Lutz Hendricks & Oksana Leukhina, 2017. "How Risky is College Investment?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 140-163, October.
    8. Adam Blandin & Christopher Herrington, 2018. "Family Structure, Human Capital Investment, and Aggregate College Attainment," 2018 Meeting Papers 446, Society for Economic Dynamics.
    9. Urvi Neelakantan & Ivan Vidangos & Felicia Ionescu & Kartik Athreya, 2016. "Investment Opportunities and the Sources of Lifetime Inequality," 2016 Meeting Papers 1177, Society for Economic Dynamics.
    10. Kartik Athreya & Felicia Ionescu & Ivan Vidangos & Urvi Neelakantan, 2018. "Investment Opportunities and Economic Outcomes: Who Benefits From College and the Stock Market?," 2018 Meeting Papers 1151, Society for Economic Dynamics.
    11. Sungwon Lee, 2020. "Identification and Confidence Regions for Treatment Effect and its Distribution under Stochastic Dominance," Working Papers 2011, Nam Duck-Woo Economic Research Institute, Sogang University (Former Research Institute for Market Economy).
    12. Hazan, Moshe & Zoabi, Hosny & Weiss, David & Leukhina, Oksana & Bar, Michael, 2017. "Is The Market Pronatalist? Inequality, Differential Fertility, and Growth Revisited," CEPR Discussion Papers 12376, C.E.P.R. Discussion Papers.
    13. Kevin Donovan & Christopher Herrington, 2019. "Factors Affecting College Attainment and Student Ability in the U.S. since 1900," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 31, pages 224-244, January.
    14. Francesc Obiols-Homs & Virginia Sánchez-Marcos, 2015. "Education, Occupation-Mismatch and Unemployment," Working Papers 807, Barcelona School of Economics.
    15. Obiols-Homs, F. & Sánchez-Marcos, V., 2018. "Education outcomes and the labor market," Labour Economics, Elsevier, vol. 54(C), pages 14-28.
    16. Aaron Hedlund & Grey Gordon, 2017. "Accounting for Tuition Increases at U.S. Colleges," 2017 Meeting Papers 1550, Society for Economic Dynamics.
    17. Francesc Dilme & Fei Li:, 2012. "Dynamic Education Signaling with Dropout, Second Version," PIER Working Paper Archive 13-048, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 03 Sep 2013.
    18. Francesc Dilme & Fei Li, 2013. "Dynamic Education Signaling with Dropout Risk, Third Version," PIER Working Paper Archive 14-014, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 24 Apr 2014.

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    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • I21 - Health, Education, and Welfare - - Education - - - Analysis of Education

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