University Dropout Problems and Solutions

High dropout rates are often thought to signal ine¢ cient education, but students can drop out of optional higher education only if they previously chose to enroll. This paper shows that dropout is more likely when higher uncertainty increases the probability of news that o¤set an expectation at enrollment that completion would be better than drop out. Higher uncertainty also increases the value of the option to drop out, so opportunities to enroll and possibly drop out are more valuable ex ante and average educational outcomes are better ex post for degree programs and groups of students with higher uncertainty and e¢ ciently more frequent dropout. Poor information at enrolment, liquidity constraints, and other imperfections can also explain high dropout rates, but attempts to remedy dropout symptoms rather than their underlying causes can introduce new ine¢ ciencies.