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Educational opportunity and the college premium

Listed author(s):
  • Igal Hendel
  • Joel Shapiro
  • Paul Willen

Since World War II, the United States government has made improved access to higher education a priority. This e¤ort has substantially increased the number of people who complete college. We show that by reducing the effective interest rate on borrowing for education, such policies can actually increase the gap in wages between those with a college education and those without. The mechanism that drives our results is the ‘signaling’ role of education first explored by Spence (1973). We argue that financial constraints on education reduce the value of education as a signal. We solve for the reduced form relationship between the interest rate and the wage premium in the steady state of a dynamic asymmetric information model. In addition, we discuss evidence of decreases in borrowing costs for education financing in the U.S.

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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 560.

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Date of creation: May 2001
Handle: RePEc:upf:upfgen:560
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