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Schooling choices: Preferences, discount rates, and rates of return

Author

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  • Hessel Oosterbeek

    () (University of Amsterdam, Department of Economics, Roetersstraat 11, 1018 WB Amsterdam, The Netherlands)

  • Hans van Ophem

    () (University of Amsterdam, Department of Economics, Roetersstraat 11, 1018 WB Amsterdam, The Netherlands)

Abstract

This paper develops an empirical model to identify the structural parameters of schooling preferences and human capital production. Our model distinguishes between consumption and investment motives with regard to schooling. The results show that both motives matter. Preferences for schooling vary with social background and ability. Children from poorer social backgrounds and of lower ability have a lower preference for schooling. The discount rate that enters the net value of lifetime income varies with social background as well. The marginal rate of return to schooling decreases with ability and schooling. On average the marginal rate of return is 7.3 per cent, which can be contrasted with a `Mincerian' rate of return equal to 4.8 per cent. This indicates that the usual OLS estimate underestimates the true rate of return.

Suggested Citation

  • Hessel Oosterbeek & Hans van Ophem, 2000. "Schooling choices: Preferences, discount rates, and rates of return," Empirical Economics, Springer, vol. 25(1), pages 15-34.
  • Handle: RePEc:spr:empeco:v:25:y:2000:i:1:p:15-34 Note: received: November 1997/Final version received: February 1999
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    Cited by:

    1. Tolan, Songül & Kemptner, Daniel, 2016. "The Role of Time Preferences in Educational Decision Making," Annual Conference 2016 (Augsburg): Demographic Change 145756, Verein für Socialpolitik / German Economic Association.
    2. Carlos Giovanni González Espitia & Jhon James Mora Rodríguez & Andrés Felipe Cuadros Meñaca, 2014. "Oportunidades educativas y características familiares en Colombia: un análisis por cohortes," REVISTA DE ECONOMÍA DEL ROSARIO, UNIVERSIDAD DEL ROSARIO, June.
    3. Julia Reilich, 2011. "Smoking and Returns to Education: Empirical Evidence for Germany," SOEPpapers on Multidisciplinary Panel Data Research 420, DIW Berlin, The German Socio-Economic Panel (SOEP).
    4. Alstadsí¦ter, Annette & Kolm, Ann-Sofie & Larsen, Birthe, 2008. "Money or joy: The choice of educational type," European Journal of Political Economy, Elsevier, vol. 24(1), pages 107-122, March.
    5. Manuel Salas Velasco, 2004. "Rendimientos privados de las inversiones en educación superior a partir de ecuaciones de ingresos," Hacienda Pública Española, IEF, vol. 169(2), pages 87-117, June.
    6. Wolter, Stefan C. & Zbinden, André, 2001. "Rates of Return to Education: The View of Students in Switzerland," IZA Discussion Papers 371, Institute for the Study of Labor (IZA).
    7. Annette Alstadsæter, 2011. "Measuring the Consumption Value of Higher Education," CESifo Economic Studies, CESifo, vol. 57(3), pages 458-479, September.
    8. John Cullinan & Darragh Flannery & Sharon Walsh & Selina Mccoy, 2013. "Distance Effects, Social Class and the Decision to Participate in Higher Education in Ireland," The Economic and Social Review, Economic and Social Studies, vol. 44(1), pages 19-51.
    9. Brian Jacob & Brian McCall & Kevin M. Stange, 2013. "College as Country Club: Do Colleges Cater to Students' Preferences for Consumption?," NBER Working Papers 18745, National Bureau of Economic Research, Inc.
    10. Fersterer, Josef & Winter-Ebmer, Rudolf, 2003. "Smoking, discount rates, and returns to education," Economics of Education Review, Elsevier, vol. 22(6), pages 561-566, December.
    11. Daniel Kemptner & Songül Tolan, 2016. "The Role of Time Preferences in Educational Decision Making," Discussion Papers of DIW Berlin 1628, DIW Berlin, German Institute for Economic Research.
    12. Wambugu, Anthony, 2002. "Family Background, Education and Earnings in Kenya," Working Papers in Economics 76, University of Gothenburg, Department of Economics.
    13. Flannery, Darragh & O'Donoghue, Cathal, 2009. "The Determinants of Higher Education Participation in Ireland: A Micro Analysis," The Economic and Social Review, Economic and Social Studies, vol. 40(1), pages 73-107.
    14. Mª del Salinas-Jiménez & Joaquín Artés & Javier Salinas-Jiménez, 2011. "Education as a Positional Good: A Life Satisfaction Approach," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 103(3), pages 409-426, September.
    15. Hyung, Namwon & de Vries, Casper G., 2007. "Portfolio selection with heavy tails," Journal of Empirical Finance, Elsevier, vol. 14(3), pages 383-400, June.
    16. Anchor, John R. & Fiserová, Jana & Mars[iota]ková, Katerina & Urbánek, Václav, 2011. "Student expectations of the financial returns to higher education in the Czech Republic and England: Evidence from business schools," Economics of Education Review, Elsevier, vol. 30(4), pages 673-681, August.
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    More about this item

    Keywords

    Human capital; schooling preferences; wages; ability;

    JEL classification:

    • I20 - Health, Education, and Welfare - - Education - - - General
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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