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Education choice under uncertainty and public policy

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  • Vincent (Vincent Peter) Hogan
  • Ian Walker

Abstract

We analyse how progressive taxation and education subsidies affect schooling decisions when the returns to education are stochastic. We use the theory of real options to solve the problem of education choice in a dynamic, life-cycle consistent, stochastic model. We show that education attainment will be an increasing function of the risk associated with education. Furthermore, this result holds whether or not agents can borrow in order to pay for education and regardless of the degree of risk aversion. We also examine the link between consumption over the life-cycle and education choice to show that higher initial wealth will usually - but not always - have a positive effect on education attainment. Finally we show that progressive taxes will tend to reduce education attainment for the poor but increase it for the rich.

Suggested Citation

  • Vincent (Vincent Peter) Hogan & Ian Walker, 2003. "Education choice under uncertainty and public policy," Working Papers 200302, School of Economics, University College Dublin.
  • Handle: RePEc:ucn:wpaper:200302
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    File URL: http://hdl.handle.net/10197/932
    File Function: First version, 2003
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    References listed on IDEAS

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    1. Heckman, James J & Lochner, Lance & Taber, Christopher, 1998. "Tax Policy and Human-Capital Formation," American Economic Review, American Economic Association, pages 293-297.
    2. James J. Heckman & Lance J. Lochner & Petra E. Todd, 2003. "Fifty Years of Mincer Earnings Regressions," NBER Working Papers 9732, National Bureau of Economic Research, Inc.
    3. Judd, Kenneth L, 1998. "Taxes, Uncertainty, and Human Capital," American Economic Review, American Economic Association, pages 289-292.
    4. Harmon, Colm & Hogan, Vincent & Walker, Ian, 2003. "Dispersion in the economic return to schooling," Labour Economics, Elsevier, pages 205-214.
    5. Uusitalo, R. & Conneely, K., 1998. "Estimating Heterogeneous Treatment Effects in the Becker Schooling Model," University of Helsinki, Department of Economics 435, Department of Economics.
    6. Goldin, Claudia, 1979. "Household and market production of families in a late nineteenth century American city," Explorations in Economic History, Elsevier, vol. 16(2), pages 111-131, April.
    7. Keane, Michael P & Wolpin, Kenneth I, 1997. "The Career Decisions of Young Men," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 473-522, June.
    8. Trostel, Philip A, 1993. "The Effect of Taxation on Human Capital," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 327-350, April.
    9. Williams, Joseph T, 1979. "Uncertainty and the Accumulation of Human Capital over the Life Cycle," The Journal of Business, University of Chicago Press, vol. 52(4), pages 521-548, October.
    10. Heckman, James J & Lochner, Lance & Taber, Christopher, 1998. "Tax Policy and Human-Capital Formation," American Economic Review, American Economic Association, pages 293-297.
    11. Eaton, Jonathan & Rosen, Harvey S, 1980. "Taxation, Human Capital, and Uncertainty," American Economic Review, American Economic Association, pages 705-715.
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    Citations

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    Cited by:

    1. Pedro Martins & Jim Jin, 2010. "Firm-level social returns to education," Journal of Population Economics, Springer;European Society for Population Economics, pages 539-558.
    2. Frank M. Fossen & Daniela Glocker, 2009. "Expected Future Earnings, Taxation, and University Enrollment: A Microeconometric Model with Uncertainty," Discussion Papers of DIW Berlin 934, DIW Berlin, German Institute for Economic Research.
    3. Migali, Giuseppe, 2006. "Funding Higher Education and Wage Uncertainty: Income Contingent Loan Versus Mortgate Loan," The Warwick Economics Research Paper Series (TWERPS) 740, University of Warwick, Department of Economics.
    4. Jacobs, Bas, 2007. "Real options and human capital investment," Labour Economics, Elsevier, pages 913-925.
    5. Hogan, Vincent & Walker, Ian, 2007. "Education choice under uncertainty: Implications for public policy," Labour Economics, Elsevier, vol. 14(6), pages 894-912, December.
    6. Hou, Linke & Wang, Xiaobing & Yu, Xiaohua, 2011. "Rational Expectation and Education Rewarding: The Case of Chinese Off-Farm Wage Employment," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114530, European Association of Agricultural Economists.
    7. Migali, Giuseppe, 2012. "Funding higher education and wage uncertainty: Income contingent loan versus mortgage loan," Economics of Education Review, Elsevier, pages 871-889.

    More about this item

    Keywords

    Education choice; Dynamic optimization; Optimal stopping; Uncertainty; Education and state--Great Britain; Human capital; Education and state--Europe;

    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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