Does Risk Matter? A Semiparametric Model for Educational Choices in the Presence of Uncertainty

Abstract

Standard human capital theory suggests that individuals select into education in order to maximize their utility. If agents are risk averse, they select the educational level that minimizes future uncertainty. The possibility of self-selection complicates the identi cation of the causal contribution of education to uncertainty in future payo s. In this paper the assumption of endogenous school choices due to concerns about future risk is tested and the importance of uncertainty in shaping schooling choices is assessed. Relying on a exible semiparametric procedure allowing for self selection, bounds for the e ect of eld of study in college on uncertainty are estimated and, in a second stage, exploited for modeling schooling choices. The results of the empirical investigation do con rm that individuals self-select into education in order to minimize uncertainty and maximize returns. Only selection of Humanities type of majors is una ected by risk or expected returns.

Consumer Risk Preferences and Higher Education Enrollment Decisions

“…In a similar analysis, Kodde () conducted an empirical investigation using a sample of high school students and concluded that the effect of increasing risk (i.e., earnings risk) cannot be signed unambiguously; his empirical results indicated that increasing earnings risk is associated with increased demand for education. More recently, Mazza () found that uncertainty plays an important role in education choices (e.g., academic major) and that individuals generally pursue higher education in an attempt to minimize uncertainty and maximize returns. Fossen and Glocker () found that higher expected returns to education increase the probability of enrollment, while greater uncertainty decreases it.…”

“…Choosing whether or not to pursue higher education is risky because consumers do not know with certainty the outcome of future events, including degree completion (Hartog and Diaz‐Serrano ; Mazza ); future labor market supply and demand (Carnevale, Cheah, and Strohl ; Fossen and Glocker ; Kodde ); individual longevity, which affects the duration of earnings realization (Kodde, ); and location in the earnings distribution (Hartog and Diaz‐Serrano ; Kodde ; Levhari and Weiss ; Mazza ). However, there remains a lack of understanding among researchers and policymakers regarding how young adults perceive and handle the risk involved in higher education choices (Dickson and Harmon ).…”