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Do risk aversion and wages explain educational choices?

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  • Brodaty, Thomas
  • Gary-Bobo, Robert J.
  • Prieto, Ana

Abstract

We study a model in which a student's investment in education maximizes expected utility conditional on public and private information. The model takes future wage risk into account and treats the direct and opportunity costs of education as additional sources of risk. In particular, the time needed to complete a degree is random. The data show that time-to-degree is substantially dispersed, conditional on the highest degree. We find significant and substantial effects of expected returns on individual education choices. The risk affecting education costs and, in particular, the randomness of time-to-degree, also plays an important role in explaining enrollment in higher education. We find precise estimates of the CRRA risk-aversion parameter, between 0.6 and 0.9. Heterogeneity in risk attitudes is significant, even in sub-populations. The sons of professionals bear more risk and are more risk averse than the rest of the sample. Yet, they study more because of higher returns and markedly lower expected investment costs. Simulations show a strong impact of changes in the probability of grade retention on educational achievement.

Suggested Citation

  • Brodaty, Thomas & Gary-Bobo, Robert J. & Prieto, Ana, 2014. "Do risk aversion and wages explain educational choices?," Journal of Public Economics, Elsevier, vol. 117(C), pages 125-148.
  • Handle: RePEc:eee:pubeco:v:117:y:2014:i:c:p:125-148
    DOI: 10.1016/j.jpubeco.2014.05.003
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    Cited by:

    1. Christian Belzil & Arnaud Maurel & Modibo Sidibé, 2017. "Estimating the Value of Higher Education Financial Aid: Evidence from a Field Experiment," NBER Working Papers 23641, National Bureau of Economic Research, Inc.
    2. Robert J. Gary-Bobo & Alain Trannoy, 2015. "Optimal student loans and graduate tax under moral hazard and adverse selection," RAND Journal of Economics, RAND Corporation, vol. 46(3), pages 546-576, September.
    3. Adrian Chadi & Marco de Pinto & Gabriel Schultze, 2017. "Young, Gifted and Lazy? The Role of Ability and Labor Market Prospects in Student Effort Decisions," IAAEU Discussion Papers 201705, Institute of Labour Law and Industrial Relations in the European Union (IAAEU).

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