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Real options and human capital investment

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  • Jacobs, Bas

Abstract

This paper extends the standard human capital model with real options. Real options influence investment behavior when risky investments in human capital are irreversible and individuals can affect the timing of the investment. Option values make individuals more reluctant to invest in human capital and, as a result, required returns on the investment increase. Real options may help to explain a larger human capital premium for higher education, smaller responsiveness of higher education investments to financial incentives, and larger sensitivity of higher education to low-return outcomes and human capital risks. Higher tax rates (or lower subsidies) depress human capital investments, but to a lesser extent than in the standard human capital model. A flat income tax remains neutral if education expenditures are fully deductible.
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Suggested Citation

  • Jacobs, Bas, 2007. "Real options and human capital investment," Labour Economics, Elsevier, vol. 14(6), pages 913-925, December.
  • Handle: RePEc:eee:labeco:v:14:y:2007:i:6:p:913-925
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    Cited by:

    1. Justina Fischer & Torberg Falch, 2008. "Does a generous welfare state crowd out student effort? Panel data evidence from international student tests," TWI Research Paper Series 25, Thurgauer Wirtschaftsinstitut, Universität Konstanz.
    2. Hsiao-Lei Chu, 2015. "Private Tutoring, Wealth Constraint and Higher Education," Pacific Economic Review, Wiley Blackwell, vol. 20(4), pages 608-634, October.
    3. Fernandes, Rui & Gouveia, Borges & Pinho, Carlos, 2013. "A real options approach to labour shifts planning under different service level targets," European Journal of Operational Research, Elsevier, vol. 231(1), pages 182-189.
    4. Hwang, Wei-Yei & Liao, Shu-Yi & Huang, Mao-Lung, 2013. "Real option, human capital investment returns and higher educational policy," Economic Modelling, Elsevier, vol. 31(C), pages 447-452.
    5. Mitchell, Paul D. & Rejesus, Roderick M. & Coble, Keith H. & Knight, Thomas O., 2010. "A Real Options Framework for Analyzing Program Participation as Human Capital Investments: The Case of the Average Crop Revenue Election (ACRE) Program," Staff Paper Series 547, University of Wisconsin, Agricultural and Applied Economics.
    6. Gries, Thomas & Naude, Wim, 2009. "When to Start a New Firm?: Modelling the Timing of Novice and Serial Entrepreneurs," WIDER Working Paper Series 039, World Institute for Development Economic Research (UNU-WIDER).
    7. Joop Hartog & Luis Diaz-Serrano, 2015. "Why Do We Ignore the Risk in Schooling Decisions?," De Economist, Springer, vol. 163(2), pages 125-153, June.
    8. Amegashie, J. Atsu & Ouattara, Bazoumanna & Strobl, Eric, 2007. "Moral Hazard and the Composition of Transfers: Theory with an Application to Foreign Aid," MPRA Paper 3158, University Library of Munich, Germany, revised 06 May 2007.
    9. Falch, Torberg & Fischer, Justina AV, 2011. "Welfare state generosity and student performance: Evidence from international student tests," MPRA Paper 35269, University Library of Munich, Germany.
    10. Bilkic, N. & Gries, T. & Pilichowski, M., 2012. "Stay in school or start working? — The human capital investment decision under uncertainty and irreversibility," Labour Economics, Elsevier, vol. 19(5), pages 706-717.
    11. Torberg Falch & Justina AV Fischer, 2016. "Welfare state generosity and student performance: Evidence from international student tests 1980 ? 2003," Working Paper Series 17316, Department of Economics, Norwegian University of Science and Technology.
    12. Torberg Falch & Justina AV Fischer, 2008. "Does a generous welfare state crowd out student achievement? Panel data evidence from international student tests," TWI Research Paper Series 31, Thurgauer Wirtschaftsinstitut, Universität Konstanz.
    13. Bas Jacobs, 2009. "Is Prescott right? Welfare state policies and the incentives to work, learn, and retire," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(2), pages 253-280, April.
    14. repec:spr:jknowl:v:8:y:2017:i:2:d:10.1007_s13132-016-0434-0 is not listed on IDEAS
    15. Lopez, Ramon, 2009. "Natural disasters and the dynamics of intangible assets," Policy Research Working Paper Series 4874, The World Bank.
    16. Anna Zaharieva, 2014. "On-the-Job Search and Optimal Schooling under Uncertainty and Irreversibility," Politica economica, Società editrice il Mulino, issue 2-3, pages 299-339.

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