Education Choice under Uncertainty and Public Policy
AbstractWe analyse how progressive taxation and education subsidies affect schooling deci- sions when the returns to education are stochastic. We use the theory of real options to solve the problem of education choice in a dynamic, life-cycle consistent, stochastic model. We show that education attainment will be an increasing function of the risk associated with education. Furthermore, this result holds whether or not agents can borrow in order to pay for education and regardless of the degree of risk aversion. We also examine the link between consumption over the life-cycle and education choice to show that higher initial wealth will usually - but not always - have a positive effect on education attainment. Finally we show that progressive taxes will tend to reduce education attainment for the poor but increase it for the rich.
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Bibliographic InfoPaper provided by School Of Economics, University College Dublin in its series Working Papers with number 200302.
Length: 49 pages
Date of creation: 21 Jan 2003
Date of revision:
Education Choice; Dynamic Optimization; Optimal Stopping; Uncertainty;
Find related papers by JEL classification:
- J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
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