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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. Eaton, Jonathan & Rosen, Harvey S, 1980. "Taxation, Human Capital, and Uncertainty," American Economic Review, American Economic Association, vol. 70(4), pages 705-715, September.
    2. Trostel, Philip A, 1993. "The Effect of Taxation on Human Capital," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 327-350, April.
    3. 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.
    4. 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.
    5. Harmon, Colm & Hogan, Vincent & Walker, Ian, 2003. "Dispersion in the economic return to schooling," Labour Economics, Elsevier, vol. 10(2), pages 205-214, April.
    6. 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.
    7. Jacob A. Mincer, 1974. "Schooling and Earnings," NBER Chapters, in: Schooling, Experience, and Earnings, pages 41-63, National Bureau of Economic Research, Inc.
    8. Heckman, James J & Lochner, Lance & Taber, Christopher, 1998. "Tax Policy and Human-Capital Formation," American Economic Review, American Economic Association, vol. 88(2), pages 293-297, May.
    9. Judd, Kenneth L, 1998. "Taxes, Uncertainty, and Human Capital," American Economic Review, American Economic Association, vol. 88(2), pages 289-292, May.
    10. Uusitalo, R. & Conneely, K., 1998. "Estimating Heterogeneous Treatment Effects in the Becker Schooling Model," University of Helsinki, Department of Economics 435, Department of Economics.
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    Citations

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    Cited by:

    1. 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.
    2. Jacobs, Bas, 2007. "Real options and human capital investment," Labour Economics, Elsevier, vol. 14(6), pages 913-925, December.
    3. 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.
    4. Frank M. Fossen & Daniela Glocker, 2009. "Expected Future Earnings, Taxation, and University Enrollment: A Microeconometric Model with Uncertainty," SOEPpapers on Multidisciplinary Panel Data Research 241, DIW Berlin, The German Socio-Economic Panel (SOEP).
    5. Migali, Giuseppe, 2012. "Funding higher education and wage uncertainty: Income contingent loan versus mortgage loan," Economics of Education Review, Elsevier, vol. 31(6), pages 871-889.
    6. Santiago Budria, 2010. "Schooling and the distribution of wages in the European private and public sectors," Applied Economics, Taylor & Francis Journals, vol. 42(8), pages 1045-1054.
    7. Pedro Martins & Jim Jin, 2010. "Firm-level social returns to education," Journal of Population Economics, Springer;European Society for Population Economics, vol. 23(2), pages 539-558, March.
    8. Corrado Andini, 2009. "On the return-risk link in education," Applied Economics Letters, Taylor & Francis Journals, vol. 16(3), pages 307-314.
    9. Andini, Corrado & Pereira, Pedro T., 2007. "Full-time Schooling, Part-time Schooling, and Wages: Returns and Risks in Portugal," IZA Discussion Papers 2651, Institute of Labor Economics (IZA).
    10. Takashi Oshio & Masaya Yasuoka, 2009. "How Long Should We Stay In Education If Ability Is Screened?," Metroeconomica, Wiley Blackwell, vol. 60(3), pages 409-431, July.
    11. Hogan, Vincent & Walker, Ian, 2007. "Education choice under uncertainty: Implications for public policy," Labour Economics, Elsevier, vol. 14(6), pages 894-912, December.

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    More about this item

    Keywords

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

    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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