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College Risk and Return

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  • Gonzalo Castex

Abstract

Attending college is thought of as a very profitable investment decision, as its estimated annualized return ranges from 8% to 13%. However, a large fraction of high school graduates do not enroll in college. I reconcile the observed high average returns to schooling with relatively low attendance rates when considering college as a risky investment decision. A high dropout risk has two important effects on the estimated average returns to college: selection bias and risk premium. In order to explicitly consider the selection bias, I explore the dropout risk in a life-cycle model with heterogeneous ability. The risk-premium of college participation accounts for 21% of the excess returns to college education for highability students and 19% of the excess return for low-ability students. Risk averse agents are willing to reduce their return to college in order to avoid the dropout risk. The effect is not uniform across ability levels.

Suggested Citation

  • Gonzalo Castex, 2011. "College Risk and Return," Working Papers Central Bank of Chile 606, Central Bank of Chile.
  • Handle: RePEc:chb:bcchwp:606
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    Cited by:

    1. Abel, Jaison R. & Deitz, Richard, 2013. "Do the benefits of college still outweigh the costs?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 20.
    2. 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.
    3. 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).
    4. Yongseok Shin & Sang Yoon Lee & Donghoon Lee, 2012. "The Option Value of Human Capital," 2012 Meeting Papers 1033, Society for Economic Dynamics.
    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. 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.

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