Book Description

"I analyze two issues on the efficiency of schooling choice. The first chapter analyzes changes in the distribution of college enrollment rates that occurred between 1980 and 2000. It aims not only to explain the 69% increase in the overall college enrollment rates, but also changes in the distribution of college attendees by their ability and financial status. College attendance increased by 27% less than the overall trend for individuals in the lowest quartile of the joint family income and ability distribution. However, it increased by 12% more than the trend for individuals in the highest quartile. To explain these changes, I construct a quantitative life-cycle model of labor supply and human capital formation. The model is calibrated to match schooling patterns and labor market outcomes for the 1980 and 2000 cohorts. I explicitly model four potential driving forces to explain the observed changes. First, college wage premium increased during the 1980 - 2000 period. This increase had a positive effect on enrollment across all profiles and the largest gain was for the low-ability and low-income groups. Second, there was a merit-oriented reform in distribution of grants which mostly increased college attendance of high-ability students. Third, increase in tuition costs led to reduced attendance across all profiles. This effect was particularly strong for students from low-income families. Fourth, the joint distribution of ability and family income shifted, affecting allocation of grants as well as educational success and expected college wages. This shift had the largest positive effect on students in the center of the ability distribution as they experienced rising incentives to attend college. The second chapter studies the role of college dropout risk premium on returns to education and attendance decisions. Attending college has been considered one of the most profitable investment decisions, as its estimated annualized return ranges from 8% to 13%. However, a large fraction of high school graduates do not enroll in college. Using a simple risk premium approach, I reconcile the observed high average returns to schooling with relatively low attendance rates. A high dropout risk has two important effects on the estimated average returns to college: selection bias and risk premium. Once taking into account dropout risk, a simple calculation of risk premium accounts for 51% of the excess of return to college education. In order to explicitly consider the selection bias, I further explore the dropout risk in a life-cycle model with heterogeneous ability. The risk-premium of college participation accounts for 29% of the excess of returns to college education for high-ability students, and accounts for 27% of the excess return for low-ability students, since they face a larger college dropout risk. Risk averse agents are willing to reduce their return to college in order to avoid the dropout risk. The effect is not uniform across ability levels"--Leaves v-vi.