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Family Background and Optimal Schooling Decisions

  • Lazear, Edward P

In this paper, another aspect of optimizing behavior is considered. Specifically, it asks whether variations in levels of attained schooling across groups can be explained by a model that assumes that capital markets are perfect and that individuals maximize wealth. The logic of the analysis proceeds as follows: First, a model is constructed that allows estimation of costs and returns to education for each individual, based on the assumption that all individuals face the same borrowing rates. Given costs and returns, one can obtain an optimal wealth-maximizing level of education for each individual. Differences between actually acquired and wealth-maximizing levels of education can then be calculated, and one can determine whether or not the residuals are systematically related to background variables. If, for example, low-income individuals have a consistently larger estimated wealth-maximizing level of education than actual level, one could conclude either that returns to schooling differed between groups or that capital market differences exist. The model allows these two explanations to be distinguished. Since differential returns are caused by wage differences across groups, the wealth-maximizing level can take these labor market variations into account. Any residual variation will be due to factors other than differential wage rates, presumably capital cost differences .

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Article provided by MIT Press in its journal Review of Economics & Statistics.

Volume (Year): 62 (1980)
Issue (Month): 1 (February)
Pages: 42-51

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Handle: RePEc:tpr:restat:v:62:y:1980:i:1:p:42-51
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  1. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, vol. 47(1), pages 153-61, January.
  2. Lazear, Edward P, 1976. "Age, Experience, and Wage Growth," American Economic Review, American Economic Association, vol. 66(4), pages 548-58, September.
  3. Griliches, Zvi, 1976. "Wages of Very Young Men," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages S69-85, August.
  4. Bowles, Samuel, 1972. "Schooling and Inequality from Generation to Generation," Journal of Political Economy, University of Chicago Press, vol. 80(3), pages S219-S51, Part II, .
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