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Opportunity Unraveled: Private Information and the Missing Markets for Financing Human Capital

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  • Daniel Herbst
  • Nathaniel Hendren

Abstract

We examine whether adverse selection has unraveled private markets for equity and state-contingent debt contracts for financing higher education. Using survey data on beliefs, we show a typical college-goer would have to repay $1.64 in present value for every $1 of financing to overcome adverse selection in an equity market. We find that risk-averse college-goers are not willing to accept these terms, so markets unravel. We discuss why moral hazard, biased beliefs, and outside credit options are less likely to explain the absence of these markets. We quantify the welfare gains for subsidizing equity-like contracts that mitigate college-going risks.

Suggested Citation

  • Daniel Herbst & Nathaniel Hendren, 2024. "Opportunity Unraveled: Private Information and the Missing Markets for Financing Human Capital," American Economic Review, American Economic Association, vol. 114(7), pages 2024-2072, July.
    • Handle: RePEc:aea:aecrev:v:114:y:2024:i:7:p:2024-72
    DOI: 10.1257/aer.20211653
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    References listed on IDEAS

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    1. Seth D. Zimmerman, 2014. "The Returns to College Admission for Academically Marginal Students," Journal of Labor Economics, University of Chicago Press, vol. 32(4), pages 711-754.
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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • I23 - Health, Education, and Welfare - - Education - - - Higher Education; Research Institutions
    • I26 - Health, Education, and Welfare - - Education - - - Returns to Education
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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