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Education Choice under Uncertainty - Implications for Public Policy

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Author Info
Vincent Hogan (University College of Dublin)
Ian Walker (University of Warwick)

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Abstract

We analyse how progressive taxation and education subsidies affect schooling decisions when the returns to education are stochastic. We use the theory of real options to solve the problem of education choice in a dynamic stochastic model. We show that education attainment will be an increasing function of the risk associated with education. Furthermore, this result holds regardless of the degree of risk aversion. We also show that progressive taxes will tend to increase education attainment.

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File URL: http://www.ucd.ie/economics/research/papers/2006/WP06.15.pdf
File Format: application/pdf
File Function: First version, 2006
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Publisher Info
Paper provided by School Of Economics, University College Dublin in its series Working Papers with number 200615.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length: 33 pages
Date of creation: 24 Nov 2006
Date of revision:
Handle: RePEc:ucn:wpaper:200615

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Related research
Keywords: Education Choice; Dynamic Optimization; Optimal Stopping; Uncertainty;

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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 and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Belzil, Christian & Hansen, Jörgen, 2002. "Earnings Dispersion, Risk Aversion and Education," IZA Discussion Papers 513, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  2. Heckman, James J & Lochner, Lance & Taber, Christopher, 1998. "Tax Policy and Human-Capital Formation," American Economic Review, American Economic Association, vol. 88(2), pages 293-97, May. [Downloadable!] (restricted)
    Other versions:
  3. J. Dominitz & C. F. Manski, . "Eliciting student expectations of the returns to schooling," Institute for Research on Poverty Discussion Papers 1049-94, University of Wisconsin Institute for Research on Poverty. [Downloadable!]
    Other versions:
  4. Williams, Joseph T, 1979. "Uncertainty and the Accumulation of Human Capital over the Life Cycle," Journal of Business, University of Chicago Press, vol. 52(4), pages 521-48, October. [Downloadable!] (restricted)
  5. Judd, Kenneth L, 1998. "Taxes, Uncertainty, and Human Capital," American Economic Review, American Economic Association, vol. 88(2), pages 289-92, May. [Downloadable!] (restricted)
  6. 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)
    Other versions:
  7. Harmon, Colm & Hogan, Vincent & Walker, Ian, 2003. "Dispersion in the economic return to schooling," Labour Economics, Elsevier, vol. 10(2), pages 205-214, April. [Downloadable!] (restricted)
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  8. Denny, Kevin J & Harmon, Colm P, 2001. "Testing for Sheepskin Effects in Earnings Equations: Evidence for Five Countries," Applied Economics Letters, Taylor and Francis Journals, vol. 8(9), pages 635-37, September. [Downloadable!] (restricted)
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  9. Uusitalo, R. & Conneely, K., 1998. "Estimating Heterogeneous Treatment Effects in the Becker Schooling Model," University of Helsinki, Department of Economics 435, Department of Economics.
  10. Ricardo J. Caballero & Eduardo M.R.A. Engel, 1996. "Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach," Documentos de Trabajo 12, Centro de Economía Aplicada, Universidad de Chile.
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  11. James J. Heckman & Lance J. Lochner & Petra E. Todd, 2003. "Fifty Years of Mincer Earnings Regressions," NBER Working Papers 9732, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Hogan, Vincent & Ian Walker, 2002. "Education Choice under Uncertainty," Royal Economic Society Annual Conference 2002 103, Royal Economic Society. [Downloadable!]
  13. Vincent Hogan & Ian Walker, 2003. "Education Choice under Uncertainty and Public Policy," Working Papers 200302, School Of Economics, University College Dublin. [Downloadable!]
  14. Card, David, 2001. "Estimating the Return to Schooling: Progress on Some Persistent Econometric Problems," Econometrica, Econometric Society, vol. 69(5), pages 1127-60, September.
    Other versions:
  15. Eaton, Jonathan & Rosen, Harvey S, 1980. "Taxation, Human Capital, and Uncertainty," American Economic Review, American Economic Association, vol. 70(4), pages 705-15, September. [Downloadable!] (restricted)
    Other versions:
  16. 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.
    Other versions:
  17. Trostel, Philip A, 1993. "The Effect of Taxation on Human Capital," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 327-50, April. [Downloadable!] (restricted)
  18. Carneiro, Pedro & Hansen, Karsten T. & Heckman, James J., 2003. "Estimating Distributions of Treatment Effects with an Application to the Returns to Schooling and Measurement of the Effects of Uncertainty on College Choice," IZA Discussion Papers 767, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Natasha Bilkic & Thomas Gries & Margarethe Pilichowski, 2009. "Stay at school or start working? - Optimal timing of leaving school under uncertainty and irreversibility," Working Papers 10, University of Paderborn, CIE Center for International Economics. [Downloadable!]
  2. Falch, Torberg & Fischer, Justina AV, 2008. "Does a generous welfare state crowd out student effort? Panel data evidence from international student tests," Working Paper Series in Economics and Finance 694, Stockholm School of Economics. [Downloadable!]
    Other versions:
  3. Brodaty, Thomas & Gary-Bobo, Robert J. & Prieto, Ana, 2006. "Risk Aversion and Human Capital Investment: A Structural Econometric Model," CEPR Discussion Papers 5694, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Budria, Santiago, 2006. "Schooling and the distribution of wages in the european private and public sectors," MPRA Paper 90, University Library of Munich, Germany. [Downloadable!]
  5. Helene Bie Lilleør, 2008. "Can Future Uncertainty Keep Children Out of School?," CAM Working Papers 2008-06, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics. [Downloadable!]
  6. Corrado Andini & Pedro Telhado Pereira, 2007. "Full-time Schooling, Part-time Schooling, and Wages: Returns and Risks in Portugal," IZA Discussion Papers 2651, Institute for the Study of Labor (IZA). [Downloadable!]
  7. Torberg Falch & Justina A.V. Fischer, 2008. "Does a Generous Welfare State Crowd out Student Achievement? Panel Data Evidence from International Student Tests," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  8. Gries, Thomas & Naude, Wim, 2009. "When to Start a New Firm?: Modelling the Timing of Novice and Serial Entrepreneurs," Working Papers UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
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