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Subjective Beliefs and Schooling Decisions

  • Belzil, Christian


    (Ecole Polytechnique, Paris)

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 implies 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 Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2820.

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Length: 47 pages
Date of creation: May 2007
Date of revision:
Handle: RePEc:iza:izadps:dp2820
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  1. Flavio Cunha & James J. Heckman & Salvador Navarro, 2005. "Separating Uncertainty from Heterogeneity in Life Cycle Earnings," NBER Working Papers 11024, National Bureau of Economic Research, Inc.
  2. James J. Heckman & Salvador Navarro, 2005. "Dynamic Discrete Choice and Dynamic Treatment Effects," NBER Technical Working Papers 0316, National Bureau of Economic Research, Inc.
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  5. Christian Gollier, 2004. "The Economics of Risk and Time," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572249, December.
  6. Christian Belzil & Jörgen Hansen, 2004. "A Structural Analysis of the Correlated Random Coefficient Wage Regression Model," Working Papers 0405, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  7. Flavio Cunha & James J. Heckman, 2006. "A New Framework for the Analysis of Inequality," NBER Working Papers 12505, National Bureau of Economic Research, Inc.
  8. Belzil, Christian & Leonardi, Marco, 2007. "Risk Aversion and Schooling Decisions," IZA Discussion Papers 2994, Institute for the Study of Labor (IZA).
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  16. Michael P. Keane & Kenneth I. Wolpin, 1995. "The career decisions of young men," Working Papers 559, Federal Reserve Bank of Minneapolis.
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