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Abstract

Attending college seems to be a profitable and affordable investment in the US. Nevertheless, a number of academically talented young people still hesitate to attend college. This puzzle motivates this paper to test for whether college education is a risky investment. To measure the riskiness of college attendance, I estimate the risk differential in earnings between college attendees and high school graduates. This paper copes with selection bias problems and distinguishes permanent earnings risk from transitory earnings risks. Evidence indicates that investing in a four-year college education is indeed risky, suggesting that, under certain circumstances, the riskiness of college attendance is an important factor in the schooling choice.

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File URL: http://128.118.178.162/eps/lab/papers/0202/0202001.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Labor and Demography with number 0202001.

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Date of creation: 03 Feb 2002
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Handle: RePEc:wpa:wuwpla:0202001

Note: Type of Document - LaTex; prepared on PC; to print on HP;
Contact details of provider:
Web page: http://128.118.178.162

Related research

Keywords: riskiness; education; selection bias;

Find related papers by JEL classification:

• D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
• C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
• I2 - Health, Education, and Welfare - - Education

This paper has been announced in the following NEP Reports:

• NEP-ALL-2002-06-13 (All new papers)

References

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1. Attanasio, Orazio & Davis, Steven J, 1996. "Relative Wage Movements and the Distribution of Consumption," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1227-62, December.
   
   • Attanasio, O. & Davis, S.J., 1996. "Relative wage movements and the distribution of consumption," Open Access publications from University College London http://discovery.ucl.ac.u, University College London.
   • Orazio Attanasio & Steven J. Davis, 1994. "Relative Wage Movements and the Distribution of Consumption," NBER Working Papers 4771, National Bureau of Economic Research, Inc.
   • Attanasio, O. & Davis, S.J., 1994. "Relative wage movements and the distribution of consumption," Open Access publications from University College London http://discovery.ucl.ac.u, University College London.
2. Willis, Robert J & Rosen, Sherwin, 1979. "Education and Self-Selection," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages S7-36, October.
   
   • Robert J. Willis & Sherwin Rosen, 1978. "Education and Self-Selection," NBER Working Papers 0249, National Bureau of Economic Research, Inc.
3. Richard Blundell & Ian Preston, 1998. "Consumption Inequality And Income Uncertainty," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 603-640, May.
   
   • Blundell, R & Preston, I, 1998. "Consumption inequality and income uncertainty," Open Access publications from University College London http://discovery.ucl.ac.u, University College London.
   • Richard Blundell & Ian Preston, 1997. "Consumption, inequality and income uncertainty," IFS Working Papers W97/15, Institute for Fiscal Studies.
4. John Y. Campbell, 1993. "Understanding Risk and Return," NBER Working Papers 4554, National Bureau of Economic Research, Inc.
   
   • Campbell, John Y, 1996. "Understanding Risk and Return," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 298-345, April.
   • John Y. Campbell, 1995. "Understanding Risk and Return," Harvard Institute of Economic Research Working Papers 1711, Harvard - Institute of Economic Research.
   • Campbell, John, 1996. "Understanding Risk and Return," Scholarly Articles 3153293, Harvard University Department of Economics.
5. Taber, Christopher R., 2000. "Semiparametric identification and heterogeneity in discrete choice dynamic programming models," Journal of Econometrics, Elsevier, vol. 96(2), pages 201-229, June.
6. Acemoglu, Daron & Pischke, Jorn-Steffen, 2001. "Changes in the wage structure, family income, and children's education," Open Access publications from London School of Economics and Political Science http://eprints.lse.ac.uk/, London School of Economics and Political Science.
   
   • Acemoglu, Daron & Pischke, J. -S., 2001. "Changes in the wage structure, family income, and children's education," European Economic Review, Elsevier, vol. 45(4-6), pages 890-904, May.
   • Daron Acemoglu & Jorn-Steffen Pischke, 2000. "Changes in the Wage Structure, Family Income, and Children's Education," NBER Working Papers 7986, National Bureau of Economic Research, Inc.
7. David Card, 1994. "Earnings, Schooling, and Ability Revisited," NBER Working Papers 4832, National Bureau of Economic Research, Inc.
   
   • David Card, 1994. "Earnings, Schooling, and Ability Revisited," Working Papers 710, Princeton University, Department of Economics, Industrial Relations Section..
8. Meghir, Costas & Palme, Mårten, 1999. "Assessing the Effect of Schooling on Earnings Using a Social Experiment," Working Paper Series in Economics and Finance 313, Stockholm School of Economics.
   
   • Costas Meghir & Marten Palme, 2000. "Assessing the Effect of Schooling on Earnings Using a Social Experiment," Econometric Society World Congress 2000 Contributed Papers 0670, Econometric Society.
   • Costas Meghir & Mårten Palme, 1999. "Assessing the effect of schooling on earnings using a social experiment," IFS Working Papers W99/10, Institute for Fiscal Studies.
9. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, vol. 47(1), pages 153-61, January.
10. Angrist, Joshua D & Newey, Whitney K, 1991. "Over-Identification Tests in Earnings Functions with Fixed Effects," Journal of Business & Economic Statistics, American Statistical Association, vol. 9(3), pages 317-23, July.
11. Richard Blundell & Thomas M. Stoker, 1994. "Consumption and the timing of income risk," IFS Working Papers W94/09, Institute for Fiscal Studies.
    
    • Blundell, Richard & M. Stoker, Thomas, 1999. "Consumption and the timing of income risk," European Economic Review, Elsevier, vol. 43(3), pages 475-507, March.
12. Ekaterini Kyriazidou, 1997. "Estimation of a Panel Data Sample Selection Model," Econometrica, Econometric Society, vol. 65(6), pages 1335-1364, November.
13. Shea, John, 2000. "Does parents' money matter?," Journal of Public Economics, Elsevier, vol. 77(2), pages 155-184, August.
    
    • John Shea, 1997. "Does Parents' Money Matter?," NBER Working Papers 6026, National Bureau of Economic Research, Inc.
14. Levhari, David & Weiss, Yoram, 1974. "The Effect of Risk on the Investment in Human Capital," American Economic Review, American Economic Association, vol. 64(6), pages 950-63, December.
15. 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.
    
    • Joseph G. Altonji, 1991. "The Demand for and Return to Education When Education Outcomes are Uncertain," NBER Working Papers 3714, National Bureau of Economic Research, Inc.
16. Olson, Lawrence & White, Halbert & Shefrin, H M, 1979. "Optimal Investment in Schooling when Incomes are Risky," Journal of Political Economy, University of Chicago Press, vol. 87(3), pages 522-39, June.
17. Weiss, Yoram, 1972. "The Risk Element in Occupational and Educational Choices," Journal of Political Economy, University of Chicago Press, vol. 80(6), pages 1203-13, Nov.-Dec..

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Cited by:

1. Philip Oreopoulos, 2003. "Do Dropouts Drop Out Too Soon? Evidence from Changes in School-Leaving Laws," Working Papers oreo-03-01, University of Toronto, Department of Economics.
2. Philip Oreopoulos, 2003. "Do Dropouts Drop Out Too Soon? International Evidence From Changes in School-Leaving Laws," NBER Working Papers 10155, National Bureau of Economic Research, Inc.

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