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The Option Value of Human Capital

Author

Listed:
  • Yongseok Shin

    (Washington University in St. Louis)

  • Sang Yoon (Tim) Lee

    (University of Mannheim)

Abstract

We study college enrollment and completion decisions in the presence of risk in individuals' returns to college. Although the human capital acquired through education is irreversible (i.e., it cannot be decumulated or sold off), college education comes with two inherent options: (i) college students may drop out after obtaining additional information on their post-graduation wages and (ii) college graduates may take jobs that does not require a college degree, effectively protecting themselves from the left tail of the returns-to-college distribution. These two options may dominate standard risk aversion considerations so that enrollment may in fact increase in the face of larger risk. We calibrate our model to U.S. data on education and labor market outcomes in the 1980s and show that these option values are important for explaining the ensuing trends in college enrollment and dropout rates. In particular, we decompose the relative contributions of the first and second moments of the returns-to-college distribution to the trends in education decisions and labor market outcomes.

Suggested Citation

  • Yongseok Shin & Sang Yoon (Tim) Lee, 2013. "The Option Value of Human Capital," 2013 Meeting Papers 986, Society for Economic Dynamics.
  • Handle: RePEc:red:sed013:986
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    References listed on IDEAS

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    1. Lance J. Lochner & Alexander Monge-Naranjo, 2011. "The Nature of Credit Constraints and Human Capital," American Economic Review, American Economic Association, vol. 101(6), pages 2487-2529, October.
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    3. Gonzalo Castex, 2017. "College risk and return," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 91-112, October.
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    Cited by:

    1. Jared Ashworth & V. Joseph Hotz & Arnaud Maurel & Tyler Ransom, 2017. "Changes across Cohorts in Wage Returns to Schooling and Early Work Experiences," NBER Working Papers 24160, National Bureau of Economic Research, Inc.

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