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Stepping stone and option value in a model of postsecondary education

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  • Nicholas Trachter

Abstract

A stepping stone arises in risky environments with learning and transferrable human capital. An example is the role played by academic two‐year colleges in postsecondary education: Students, as they learn about the uncertain educational outcomes, can drop out or transfer up to harder and more rewarding schools, carrying a fraction of the accumulated human capital. A theory of education is built and contrasted empirically to find that (i) option value explains a large part of returns to enrollment, (ii) enrollment in academic two‐year colleges is driven by the option to transfer up, and (iii) the value of the stepping stone is small.

Suggested Citation

  • Nicholas Trachter, 2015. "Stepping stone and option value in a model of postsecondary education," Quantitative Economics, Econometric Society, vol. 6(1), pages 223-256, March.
    • Handle: RePEc:wly:quante:v:6:y:2015:i:1:p:223-256
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    Cited by:

    1. Romuald Meango & Esther Mirjam Girsberger, 2023. "Just Ask Them Twice: Choice Probabilities and Identification of Ex ante returns and Willingness-To-Pay," Papers 2303.03009, arXiv.org, revised May 2025.
    2. Jo Blanden & Matthias Doepke & Jan Stuhler, 2022. "Education inequality," CEP Discussion Papers dp1849, Centre for Economic Performance, LSE.
    3. 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.
    4. Kazushige Matsuda, 2024. "Progressive Taxation versus College Subsidies with College Dropout," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(4), pages 955-975, June.
    5. Manudeep Bhuller & Philipp Eisenhauer & Moritz Mendel, 2022. "Sequential Choices, Option Values, and the Returns to Education," Papers 2205.05444, arXiv.org, revised Jul 2024.
    6. Lutz Hendricks & Oksana Leukhina, 2018. "The Return To College: Selection And Dropout Risk," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(3), pages 1077-1102, August.
    7. 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).
    8. Romuald Méango & François Poinas, 2023. "The (Option-) Value of Overstaying," CESifo Working Paper Series 10536, CESifo.
    9. Matsuda, Kazushige & Mazur, Karol, 2022. "College education and income contingent loans in equilibrium," Journal of Monetary Economics, Elsevier, vol. 132(C), pages 100-117.
    10. Romauld Méango, 2023. "Identification of ex ante returns using elicited choice probabilities," Economics Series Working Papers 1007, University of Oxford, Department of Economics.
    11. Karol Mazur, 2021. "A note on pessimism in education and its economic consequences," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 19(4), pages 773-783, December.
    12. 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.
    13. Kim, Sie Won, 2023. "The effect of promoting access to community colleges on educational and labor market outcomes," Labour Economics, Elsevier, vol. 85(C).
    14. Philipp Eisenhauer & James J. Heckman & Stefano Mosso, 2015. "Estimation Of Dynamic Discrete Choice Models By Maximum Likelihood And The Simulated Method Of Moments," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56(2), pages 331-357, May.
    15. Matsuda, Kazushige, 2020. "Optimal timing of college subsidies: Enrollment, graduation, and the skill premium," European Economic Review, Elsevier, vol. 129(C).
    16. Ferreyra,Maria Marta & Garriga,Carlos & Martin,Juan David & Sanchez Diaz,Angelica Maria, 2020. "Raising College Access and Completion : How Much Can Free College Help ?," Policy Research Working Paper Series 9428, The World Bank.
    17. Moritz Mendel, 2024. "Nonstandard Educational Careers and Inequality," CRC TR 224 Discussion Paper Series crctr224_2024_592, University of Bonn and University of Mannheim, Germany.
    18. Luc Bridet & Margaret Leighton, 2015. "The Major Decision: Labor Market Implications of the Timing of Specialization in College," Discussion Paper Series, School of Economics and Finance 201510, School of Economics and Finance, University of St Andrews.
    19. Meango, Romuald & Girsberger, Esther Mirjam, 2024. "Identification of Ex Ante Returns Using Elicited Choice Probabilities: An Application to Preferences for Public-Sector Jobs," IZA Discussion Papers 17174, IZA Network @ LISER.
    20. Ali Ozdagli & Nicholas Trachter, 2014. "The Dropout Option in a Simple Model of College Education," Economic Quarterly, Federal Reserve Bank of Richmond, issue 4Q, pages 279-295.
    21. Manuel Macera & Hitoshi Tsujiyama, 2018. "Frictional Labor Markets, Education Choices and Wage Inequality," 2018 Meeting Papers 827, Society for Economic Dynamics.

    More about this item

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • I21 - Health, Education, and Welfare - - Education - - - Analysis of Education
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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