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Education Choice under Uncertainty and Public Policy

  • Vincent Hogan

    (University College Dublin)

  • Ian Walker

    (University of Warwick)

We analyse how progressive taxation and education subsidies affect schooling deci- sions 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.

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File URL: http://www.ucd.ie/economics/research/papers/2003/WP03.02.pdf
File Function: First version, 2003
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Paper provided by School Of Economics, University College Dublin in its series Working Papers with number 200302.

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Length: 49 pages
Date of creation: 21 Jan 2003
Date of revision:
Handle: RePEc:ucn:wpaper:200302
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Web page: http://www.ucd.ie/economics

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  1. Judd, Kenneth L, 1998. "Taxes, Uncertainty, and Human Capital," American Economic Review, American Economic Association, vol. 88(2), pages 289-92, May.
  2. Trostel, Philip A, 1993. "The Effect of Taxation on Human Capital," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 327-50, April.
  3. 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.
  4. James J. Heckman & Lance Lochner & Christopher Taber, 1998. "Tax Policy and Human Capital Formation," NBER Working Papers 6462, National Bureau of Economic Research, Inc.
  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. Michael P. Keane & Kenneth I. Wolpin, 1995. "The career decisions of young men," Working Papers 559, Federal Reserve Bank of Minneapolis.
  7. Harmon, Colm & Hogan, Vincent & Walker, Ian, 2003. "Dispersion in the economic return to schooling," Labour Economics, Elsevier, vol. 10(2), pages 205-214, April.
  8. Eaton, Jonathan & Rosen, Harvey S, 1980. "Taxation, Human Capital, and Uncertainty," American Economic Review, American Economic Association, vol. 70(4), pages 705-15, September.
  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 521-48, October.
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