Measuring the option value of education
Many recent descriptive studies find convex schooling-earnings profiles in developing countries. In these countries forward-looking students should attach option values to completing lower levels of schooling. Another option value may arise due to the uncertain economic environment in which the sequence of enrolment decisions is made. Most theoretical models that are used to motivate and interpret OLS or IV estimates of the returns to schooling assume away convexity in the schooling-earnings profile, uncertainty and the inherently dynamic nature of schooling investment decisions. This paper develops a decomposition technique that calculates the relative importance of different benefits of completing additional schooling years, including the option values associated with convex schooling returns and uncertainty. These components are then estimated on a sample of workers who has revealed a highly convex schooling-earnings profile, and who face considerable uncertainty regarding future wage offers: young black South African men. We find that rationalising the observed school enrolment decisions requires large option values of early schooling levels (mainly associated with convexity rather than uncertainty), as well as a schooling cost function that increases steeply between schooling phases.
|Date of creation:||2013|
|Date of revision:|
|Contact details of provider:|| Postal: |
Fax: +27 (0)21-808 2409
Web page: http://www.ekon.sun.ac.za
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jacob A. Mincer, 1974. "Schooling, Experience, and Earnings," NBER Books, National Bureau of Economic Research, Inc, number minc74-1, December.
- James J. Heckman, 2010.
"Building Bridges between Structural and Program Evaluation Approaches to Evaluating Policy,"
Journal of Economic Literature,
American Economic Association, vol. 48(2), pages 356-98, June.
- James J. Heckman, 2010. "Building Bridges Between Structural and Program Evaluation Approaches to Evaluating Policy," NBER Working Papers 16110, National Bureau of Economic Research, Inc.
- Francis Teal, 2001.
"Education, incomes, poverty and inequality in Ghana in the 1990s,"
CSAE Working Paper Series
2001-21, Centre for the Study of African Economies, University of Oxford.
- Francis Teal, 2004. "Education, incomes, poverty and inequality in Ghana in the 1990s," Development and Comp Systems 0409006, EconWPA.
- Jacob A. Mincer, 1974. "Introduction to "Schooling, Experience, and Earnings"," NBER Chapters, in: Schooling, Experience, and Earnings, pages 1-4 National Bureau of Economic Research, Inc.
- Belzil, Christian & Hansen, Jörgen, 2002.
"Unobserved Ability and the Return to Schooling,"
IZA Discussion Papers
508, Institute for the Study of Labor (IZA).
- Siphambe, Happy Kufigwa, 2000. "Rates of return to education in Botswana," Economics of Education Review, Elsevier, vol. 19(3), pages 291-300, June.
- Malcolm Keswell & Laura Poswell, 2004. "Returns To Education In South Africa: A Retrospective Sensitivity Analysis Of The Available Evidence," South African Journal of Economics, Economic Society of South Africa, vol. 72(4), pages 834-860, 09.
- James J. Heckman & Lance J. Lochner & Petra E. Todd, 2008.
"Earnings Functions and Rates of Return,"
NBER Working Papers
13780, National Bureau of Economic Research, Inc.
- James J. Heckman & Lance J. Lochner & Petra E. Todd, 2008. "Earnings Functions and Rates of Return," University of Western Ontario, CIBC Centre for Human Capital and Productivity Working Papers 20082, University of Western Ontario, CIBC Centre for Human Capital and Productivity.
- James J. Heckman & Lance J. Lochner & Petra E. Todd, 2008. "Earnings Functions And Rates Of Return," Working Papers 200831, Geary Institute, University College Dublin.
- Heckman, James J. & Lochner, Lance John & Todd, Petra E., 2008. "Earnings Functions and Rates of Return," IZA Discussion Papers 3310, Institute for the Study of Labor (IZA).
- Nielsen, Helena Skyt & Westergard-Nielsen, Niels, 2001. "Returns to Schooling in Less Developed Countries: New Evidence from Zambia," Economic Development and Cultural Change, University of Chicago Press, vol. 49(2), pages 365-94, January.
- Jacob Mincer, 1996. "Changes in Wage Inequality, 1970-1990," NBER Working Papers 5823, National Bureau of Economic Research, Inc.
- Francis Teal, 2001. "Education, incomes, poverty and inequality in Ghana in the 1990s," Economics Series Working Papers WPS/2001-21, University of Oxford, Department of Economics.
- Simon Appleton & John Hoddinott & John MacKinnon, 1996. "Education and health in sub-Saharan Africa," Journal of International Development, John Wiley & Sons, Ltd., vol. 8(3), pages 307-339.
When requesting a correction, please mention this item's handle: RePEc:sza:wpaper:wpapers191. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Melt van Schoor)
If references are entirely missing, you can add them using this form.