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Education choice under uncertainty: Implications for public policy

  • Hogan, Vincent
  • Walker, Ian

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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Article provided by Elsevier in its journal Labour Economics.

Volume (Year): 14 (2007)
Issue (Month): 6 (December)
Pages: 894-912

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Handle: RePEc:eee:labeco:v:14:y:2007:i:6:p:894-912
Contact details of provider: Web page: http://www.elsevier.com/locate/labeco

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  1. Card, David, 2001. "Estimating the Return to Schooling: Progress on Some Persistent Econometric Problems," Econometrica, Econometric Society, vol. 69(5), pages 1127-60, September.
  2. Uusitalo, R. & Conneely, K., 1998. "Estimating Heterogeneous Treatment Effects in the Becker Schooling Model," University of Helsinki, Department of Economics 435, Department of Economics.
  3. Christian Belzil & Jörgen Hansen, 2004. "Earnings Dispersion, Risk Aversion and Education," Working Papers 0406, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  4. Jeff Dominitz & Charles F. Manski, 1994. "Eliciting Student Expectations Of The Returns To Schooling," Econometrics 9411002, EconWPA.
  5. 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.
  6. Jacob A. Mincer, 1974. "Introduction to "Schooling, Experience, and Earnings"," NBER Chapters, in: Schooling, Experience, and Earnings, pages 1-4 National Bureau of Economic Research, Inc.
  7. Harmon, Colm & Hogan, Vincent & Walker, Ian, 2001. "Dispersion in the Economic Return to Schooling," CEPR Discussion Papers 3037, C.E.P.R. Discussion Papers.
  8. Pedro Carneiro & Karsten T. Hansen & James J. Heckman, 2003. "Estimating Distributions of Treatment Effects with an Application to the Returns to Schooling and Measurement of the Effects of Uncertainty on College," NBER Working Papers 9546, National Bureau of Economic Research, Inc.
  9. Denny, K.J. & Harmon, C.P., 1999. "Testing for Sheepskin Effects in Earnings Equations: Evidence for Five Countries," Papers 99/21, College Dublin, Department of Political Economy-.
  10. Heckman, James J. & Lochner, Lance John & Todd, Petra E., 2003. "Fifty Years of Mincer Earnings Regressions," IZA Discussion Papers 775, Institute for the Study of Labor (IZA).
  11. Hogan, Vincent & Ian Walker, 2002. "Education Choice under Uncertainty," Royal Economic Society Annual Conference 2002 103, Royal Economic Society.
  12. Caballero, R.J., 1994. "Explaining Investment Dynamics in U.S. Manufacturing: Generalized (S,s) Approach," Working papers 94-32, Massachusetts Institute of Technology (MIT), Department of Economics.
  13. Vincent (Vincent Peter) Hogan & Ian Walker, 2003. "Education choice under uncertainty and public policy," Working Papers 200302, School of Economics, University College Dublin.
  14. 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).
  15. 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.
  16. Jonathan Eaton & Harvey S. Rosen, 1979. "Taxation, Human Capital and Uncertainty," Working Papers 497, Princeton University, Department of Economics, Industrial Relations Section..
  17. Williams, Joseph T, 1979. "Uncertainty and the Accumulation of Human Capital over the Life Cycle," The Journal of Business, University of Chicago Press, vol. 52(4), pages 521-48, October.
  18. Jacob A. Mincer, 1974. "Schooling, Experience, and Earnings," NBER Books, National Bureau of Economic Research, Inc, number minc74-1, Jan-Jun.
  19. James J. Heckman & Lance Lochner & Christopher Taber, 1998. "Tax Policy and Human Capital Formation," NBER Working Papers 6462, National Bureau of Economic Research, Inc.
  20. 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.
  21. Judd, Kenneth L, 1998. "Taxes, Uncertainty, and Human Capital," American Economic Review, American Economic Association, vol. 88(2), pages 289-92, May.
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