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Stepping Stone and Option Value in a Model of Postsecondary Education

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  • Trachter, Nicholas

    (Federal Reserve Bank of Richmond)

Abstract

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.

Suggested Citation

  • Trachter, Nicholas, 2014. "Stepping Stone and Option Value in a Model of Postsecondary Education," Working Paper 14-3, Federal Reserve Bank of Richmond.
  • Handle: RePEc:fip:fedrwp:14-03
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    References listed on IDEAS

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    Cited by:

    1. 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, pages 331-357, May.
    2. 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).
    3. Hendricks, Lutz & Leukhina, Oksana, 2014. "The return to college: Selection and dropout risk," CFS Working Paper Series 487, Center for Financial Studies (CFS).
    4. 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.
    5. Luc Bridet & Margaret Leighton, 2015. "The Major Decision: Labor Market Implications of the Timing of Specialization in College," Discussion Paper Series, Department of Economics 201510, Department of Economics, University of St. Andrews.
    6. Ozdagli, Ali K. & Trachter, Nicholas, 2014. "The Dropout Option in a Simple Model of College Education," Economic Quarterly, Federal Reserve Bank of Richmond, issue 4Q, pages 279-295.

    More about this item

    Keywords

    stepping stone; investment under uncertainty; academic learning; postsecondary education; college education; returns to education;

    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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