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Stepping Stone and Option Value in a Model of Postsecondary Education

  • Trachter, Nicholas

    (Federal Reserve Bank of Richmond)

A stepping stone arises in risky environments with learning and transferable 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.

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Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 14-3.

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Length: 91 pages
Date of creation: 04 Feb 2014
Date of revision:
Handle: RePEc:fip:fedrwp:14-03
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