The Demand for and Return to Education When Education Outcomes are Uncertain
The vast literature on human capital and earnings assumes that individuals know in advance that they will complete a particular program of schooling. This paper treats education as a sequential choice that is made under uncertainty. A simple two period structural model is used to explore the effects of ability, high school preparation, preferences for schooling, the borrowing rate, and ex post payoffs to college on the probability of various post secondary college outcomes and the ex ante return to starting college. The model provides the basis for a simple empirical method of accounting for uncertainty about educational outcomes and for nonlinearity in the relationship between years of education and earnings when estimating the expected return to the first year of college. I present estimates of the effects of gender, aptitude, high school curriculum, family background characteristics, and other variables on the expected return to starting college.
|Date of creation:||May 1991|
|Date of revision:|
|Publication status:||published as Journal of Labor Economics,11, no. 1, Part 1, January 1993, p. 48-83|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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