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College risk and return

Author

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  • Gonzalo Castex

    (Banco Central de Chile)

Abstract

A large number of studies report high returns to college education. However, a large fraction of high school graduates do not pursue higher education. To reconcile these facts, I develop a heterogeneous agent life-cycle model with endogenous college enrollment and uninsurable risk of college completion. The risk of failing to complete college explains 14% (18%) of returns to a 4-year (2-year) college. Risk premium varies with individual ability and family income. Using the model, I analyze how costs and benefits of college education affect enrollments and dropouts. Model predictions are consistent with trends in enrollment and dropout observed in the data and findings in related literature. (Copyright: Elsevier)

Suggested Citation

  • Gonzalo Castex, 2017. "College risk and return," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 91-112, October.
  • Handle: RePEc:red:issued:15-118
    DOI: 10.1016/j.red.2017.03.002
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    Cited by:

    1. Gonzalo Castex, 2010. "Accounting for Changes in College Attendance Profile: a Quantitative Life-Cycle Analysis," Working Papers Central Bank of Chile 598, Central Bank of Chile.
    2. Kunz, Johannes S. & Staub, Kevin E., 2020. "Early subjective completion beliefs and the demand for post-secondary education," Journal of Economic Behavior & Organization, Elsevier, vol. 177(C), pages 34-55.
    3. Yongseok Shin & Sang Yoon Lee & Donghoon Lee, 2012. "The Option Value of Human Capital," 2012 Meeting Papers 1033, Society for Economic Dynamics.
    4. Bernhard Eckwert & Itzhak Zilcha, 2020. "The role of colleges within the higher education sector," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 69(2), pages 315-336, March.
    5. Lutz Hendricks & Oksana Leukhina, 2017. "How Risky is College Investment?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 140-163, October.
    6. Johannes S. Kunz & Kevin E. Staub, 2016. "Subjective completion beliefs and the demand for post-secondary education," Economics of Education Working Paper Series 0120, University of Zurich, Department of Business Administration (IBW).
    7. Lutz Hendricks & Oksana Leukhina, 2017. "How Risky is College Investment?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 140-163, October.
    8. Jaison R. Abel & Richard Deitz, 2013. "Do the benefits of college still outweigh the costs?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 20.

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