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Stay in school or start working? — The human capital investment decision under uncertainty and irreversibility

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  • Bilkic, N.
  • Gries, T.
  • Pilichowski, M.

Abstract

At any moment a student may decide to leave school and enter the labor market, or to stay in the education system. The timing of their departure determines their level of academic achievement and formal qualification. Education is a multi-stage process of investing in an accumulative human capital stock. How long can I expect to go to school? How much will I invest in my education? To answer these questions we apply the real option approach. We depart from recent literature by (1) adding accumulated education costs and determining the expected time of market entry, (2) considering complete earnings profiles including entry-level wages, sheepskin effects and earning dynamics, and (3) discussing the option value of schooling while introducing potential career opportunities or threats of unemployment modeled as major uncertain events connected with particular formal education achievements.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:labeco:v:19:y:2012:i:5:p:706-717 DOI: 10.1016/j.labeco.2012.04.005
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    References listed on IDEAS

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    Cited by:

    1. Zaharieva Anna, 2014. "On-the-Job Search and Optimal Schooling under Uncertainty and Irreversibility," Politica economica, Società editrice il Mulino, issue 2-3, pages 299-339.
    2. Thomas Gries & Natasa Bilkic, 2014. "Investment under Threat of Disaster," Working Papers CIE 77, Paderborn University, CIE Center for International Economics.

    More about this item

    Keywords

    Human capital theory; Uncertainty; Sheepskin effect; Irreversibility; Large stochastic shocks;

    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • I2 - Health, Education, and Welfare - - Education

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