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Measuring the option value of education

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  • Rulof P Burger

    (Department of Economics, University of Stellenbosch)

  • Francis J Teal

    (Centre for Studies of African Economics, University of Oxford)

Abstract

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.

Suggested Citation

  • Rulof P Burger & Francis J Teal, 2013. "Measuring the option value of education," Working Papers 15/2013, Stellenbosch University, Department of Economics.
  • Handle: RePEc:sza:wpaper:wpapers191
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The cheapest way to fix South Africa’s education catastrophe
      by Johan Fourie in Johan Fourie's Blog on 2015-06-09 10:47:39

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    More about this item

    Keywords

    Earnings Regressions; Returns to Schooling; Dynamic programming;
    All these keywords.

    JEL classification:

    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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