Manudeep Bhuller, University of Oslo

"Sequential Choices, Option Values and the Returns to Education"

Abstract

Human capital investments are uncertain -- drop out, re-enrollment and track switching are common phenomena. Using Norwegian administrative data with lifecycle earnings and detailed education histories, we set up a dynamic structural model of schooling decisions that captures the rich patterns of schooling choices for individuals. We distinguish ex-ante and ex-post returns to schooling, estimate the contribution of option values to overall returns, and document substantial heterogeneity in returns associated with academic and vocational tracks across individuals with different abilities. The model is validated against variation in educational choices induced by a compulsory schooling reform. Mechanisms explaining the patterns of interruptions in educational careers by ability and ‘inframarginal’ responses to schooling reforms are discussed. Our results indicate that option value of schooling, together with re-enrollment opportunities, are crucial to understand these responses. Finally, we contrast our findings to standard estimates of returns to schooling.

Authors: Manudeep Bhuller (University of Oslo), Philipp Eisenhauer (University of Bonn) and Moritz Mendel (University of Bonn)

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Contact person: Casper Worm Hansen