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Education, Disappointment and Optimal Policy

Author

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  • Dan Anderberg
  • Claudia Cerrone

Abstract

Justification for policies to encourage investments in education, particularly for individuals at the lower end of the ability distribution, may be provided by behavioural economics. We present a prototypical model where individuals who are potentially loss averse around their expected outcome make risky investments in education and we draw on optimal tax theory to explore the design of policy. The model highlights the critical roles played by (i) the relationship between behavioural risk preferences, standard risk aversion and labour supply behaviour, (ii) the risk properties of education, and (iii) the degree of observability of individual academic ability.

Suggested Citation

  • Dan Anderberg & Claudia Cerrone, 2014. "Education, Disappointment and Optimal Policy," CESifo Working Paper Series 5141, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_5141
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp5141.pdf
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    References listed on IDEAS

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    1. Ted O'Donoghue & Matthew Rabin, 2001. "Risky Behavior among Youths: Some Issues from Behavioral Economics," NBER Chapters,in: Risky Behavior among Youths: An Economic Analysis, pages 29-68 National Bureau of Economic Research, Inc.
    2. A. Lans Bovenberg & Bas Jacobs, 2005. "Redistribution and Education Subsidies are Siamese Twins," Tinbergen Institute Discussion Papers 05-036/3, Tinbergen Institute.
    3. Botond Kőszegi & Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, Oxford University Press, vol. 121(4), pages 1133-1165.
    4. David Gill & Victoria Prowse, 2012. "A Structural Analysis of Disappointment Aversion in a Real Effort Competition," American Economic Review, American Economic Association, vol. 102(1), pages 469-503, February.
    5. Raj Chetty, 2006. "A New Method of Estimating Risk Aversion," American Economic Review, American Economic Association, vol. 96(5), pages 1821-1834, December.
    6. Rampino, Tina & Taylor, Mark P., 2012. "Educational aspirations and attitudes over the business cycle," ISER Working Paper Series 2012-26, Institute for Social and Economic Research.
    7. Adam M. Lavecchia & Heidi Liu & Philip Oreopoulos, 2014. "Behavioral Economics of Education: Progress and Possibilities," NBER Working Papers 20609, National Bureau of Economic Research, Inc.
    8. Lorraine Dearden & Leslie McGranahan & Barbara Sianesi, 2004. "The Role of Credit Constraints in Educational Choices: Evidence from NCDS and BCS70," CEE Discussion Papers 0048, Centre for the Economics of Education, LSE.
    9. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
    10. da Costa, Carlos E. & Maestri, Lucas J., 2007. "The risk properties of human capital and the design of government policies," European Economic Review, Elsevier, vol. 51(3), pages 695-713, April.
    11. Guilhem Lecouteux & Léonard Moulin, 2015. "To gain or not to lose? Tuition fees for loss averse students," Economics Bulletin, AccessEcon, vol. 35(2), pages 1005-1019.
    12. Findeisen, Sebastian & Sachs, Dominik, 2016. "Education and optimal dynamic taxation: The role of income-contingent student loans," Journal of Public Economics, Elsevier, vol. 138(C), pages 1-21.
    13. Card, David, 2001. "Estimating the Return to Schooling: Progress on Some Persistent Econometric Problems," Econometrica, Econometric Society, vol. 69(5), pages 1127-1160, September.
    14. Philippe Delquié & Alessandra Cillo, 2006. "Expectations, Disappointment, and Rank-Dependent Probability Weighting," Theory and Decision, Springer, vol. 60(2), pages 193-206, May.
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    Cited by:

    1. repec:ebl:ecbull:eb-16-00850 is not listed on IDEAS
    2. Dan Anderberg & Claudia Cerrone, 2017. "Investment in education under disappointment aversion," Economics Bulletin, AccessEcon, vol. 37(3), pages 1533-1540.

    More about this item

    Keywords

    education; risk; disappointment; optimal taxation;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • I21 - Health, Education, and Welfare - - Education - - - Analysis of Education

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