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Subjective Beliefs and Schooling Decisions

  • Christian Belzil


    (GATE CNRS, Institute for the Study of Labor (IZA))

This paper considers the estimation of sequential schooling decisions made by agents who are endowed with subjective beliefs about their own ability. I use unique Italian panel data which provide information on i) the curvature of the per-period utility function, ii) schooling decisions, iii) post-schooling earnings, in order to estimate the future component of the differences in intertemporal utilities of school and work independently from the present component, (as in Geweke and Keane, 1995, 2001), and evaluate the importance of “present bias”. Under certain conditions, which include imposing equality between the modal belief and true ability, I recover individual specific subjective probability distributions. I estimate both the degree of confidence (a measure of spread) and the incidence of over (and under) estimation. I find that the future component of intertemporal utilities dominates schooling decisions. I find a strong incidence of under-estimation among the more able and a much smaller incidence of over-estimation among the low ability group. At the medium ability spectrum, there is evidence of some over-estimation. The degree of confidence is high and imply that agents have a substantial amount of inside information (36% of the population act on a degenerate subjective distribution). Overall, the variance of the objective ability heterogeneity distribution is 4 times as large the variance of the distribution characterizing subjective beliefs.

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Paper provided by Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure in its series Working Papers with number 0717.

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Length: 47 pages
Date of creation: Jul 2007
Date of revision:
Handle: RePEc:gat:wpaper:0717
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  1. Christian BELZIL & Marco LEONARDI, 2013. "Risk Aversion and Schooling Decisions," Annales d'Economie et de Statistique, ENSAE, issue 111-112, pages 3.
  2. Bellemare, C. & Kroger, S. & van Soest, A.H.O., 2005. "Actions and Beliefs : Estimating Distribution-Based Preferences Using a Large Scale Experiment with Probability Questions on Expectations," Discussion Paper 2005-82, Tilburg University, Center for Economic Research.
  3. Christian Belzil & Jörgen Hansen, 2007. "A Structural Analysis of the Correlated Random Coefficient Wage Regression Model," Post-Print halshs-00201350, HAL.
  4. Cunha, Flavio & Heckman, James J., 2007. "A New Framework for the Analysis of Inequality," IZA Discussion Papers 2565, Institute for the Study of Labor (IZA).
  5. Guiso, Luigi & Paiella, Monica, 2001. "Risk Aversion, Wealth and Background Risk," CEPR Discussion Papers 2728, C.E.P.R. Discussion Papers.
  6. Guiso, Luigi & Jappelli, Tullio & Pistaferri, Luigi, 2002. "An Empirical Analysis of Earnings and Employment Risk," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 241-53, April.
  7. Cunha, Flavio & Heckman, James J. & Navarro, Salvador, 2004. "Separating Uncertainty from Heterogeneity in Life Cycle Earnings," IZA Discussion Papers 1437, Institute for the Study of Labor (IZA).
  8. Michael P. Keane & Kenneth I. Wolpin, 1995. "The career decisions of young men," Working Papers 559, Federal Reserve Bank of Minneapolis.
  9. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 972-90, October.
  10. Daniel Houser & Michael Keane & Kevin McCabe, 2004. "Behavior in a Dynamic Decision Problem: An Analysis of Experimental Evidence Using a Bayesian Type Classification Algorithm," Econometrica, Econometric Society, vol. 72(3), pages 781-822, 05.
  11. James J. Heckman & Salvador Navarro, 2005. "Dynamic Discrete Choice and Dynamic Treatment Effects," NBER Technical Working Papers 0316, National Bureau of Economic Research, Inc.
  12. Christian Gollier, 2004. "The Economics of Risk and Time," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572249, June.
  13. Christopher J. Flinn, 2002. "Labour Market Structure and Inequality: A Comparison of Italy and the U.S," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 611-645.
  14. Ariel Rubinstein, 2005. "Discussion of 'BEHAVIORAL ECONOMICS'," Levine's Bibliography 784828000000000539, UCLA Department of Economics.
  15. Dan Lovallo & Colin Camerer, 1999. "Overconfidence and Excess Entry: An Experimental Approach," American Economic Review, American Economic Association, vol. 89(1), pages 306-318, March.
  16. Luigi Guiso & Monica Paiella, 2005. "The Role Of Risk Aversion In Predicting Individual Behavior," Temi di discussione (Economic working papers) 546, Bank of Italy, Economic Research and International Relations Area.
  17. Zvi Eckstein & Kenneth I. Wolpin, 1999. "Why Youths Drop Out of High School: The Impact of Preferences, Opportunities, and Abilities," Econometrica, Econometric Society, vol. 67(6), pages 1295-1340, November.
  18. Christian Belzil, 2006. "The Return to Schooling in Structural Dynamic Models: A Survey," Post-Print halshs-00142538, HAL.
  19. Miller, Robert A, 1984. "Job Matching and Occupational Choice," Journal of Political Economy, University of Chicago Press, vol. 92(6), pages 1086-120, December.
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