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Sequential Choices, Option Values, and the Returns to Education

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  • Manudeep Bhuller
  • Philipp Eisenhauer
  • Moritz Mendel

Abstract

Using detailed Norwegian data on earnings, education and work histories, we estimate a dynamic structural model of education and sector choices that captures rich life-cycle patterns by ability. We validate the model against variation in education choices induced by a compulsory schooling reform. Our approach allows us to estimate the ex-ante returns to different education tracks across the lifecycle by individual ability and quantify the contribution of option values. We find substantial heterogeneity in returns and establish crucial roles for option values and re-enrollment in determining education choices and the impact of schooling policies.

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  • Manudeep Bhuller & Philipp Eisenhauer & Moritz Mendel, 2024. "Sequential Choices, Option Values, and the Returns to Education," CRC TR 224 Discussion Paper Series crctr224_2024_575, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2024_575
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    Cited by:

    1. Romuald Meango & Esther Mirjam Girsberger, 2023. "Just Ask Them Twice: Choice Probabilities and Identification of Ex ante returns and Willingness-To-Pay," Papers 2303.03009, arXiv.org, revised Feb 2025.
    2. Bhuller, Manudeep & Sigstad, Henrik, 2024. "2SLS with multiple treatments," Journal of Econometrics, Elsevier, vol. 242(1).
    3. Meango, Romuald & Girsberger, Esther Mirjam, 2024. "Identification of Ex Ante Returns Using Elicited Choice Probabilities: An Application to Preferences for Public-Sector Jobs," IZA Discussion Papers 17174, Institute of Labor Economics (IZA).
    4. Poinas, François & Méango, Romuald, 2023. "The (Option-)Value of Overstaying," TSE Working Papers 23-1478, Toulouse School of Economics (TSE).
    5. Moritz Mendel, 2024. "Nonstandard Educational Careers and Inequality," CRC TR 224 Discussion Paper Series crctr224_2024_592, University of Bonn and University of Mannheim, Germany.
    6. Romauld Méango, 2023. "Identification of ex ante returns using elicited choice probabilities," Economics Series Working Papers 1007, University of Oxford, Department of Economics.

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    More about this item

    Keywords

    sequential decisions; ex-ante returns; option values; reform evaluation;
    All these keywords.

    JEL classification:

    • 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
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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