Sequential Choices, Option Values, and the Returns to Education

Abstract

Using detailed Norwegian data on earnings and education histories, we estimate a dynamic structural model of schooling and work decisions that captures our data's rich patterns over the life-cycle. We validate the model against variation in schooling choices induced by a compulsory schooling reform. Our approach allows us to estimate the ex-ante returns to different schooling tracks at different stages of the life-cycle and quantify the contribution of option values. We find substantial heterogeneity in returns and establish crucial roles for option values and re-enrollment in determining schooling choices and the impact of schooling policies.

Identification of Ex Ante Returns Using Elicited Choice Probabilities

“…The paper is part of an active literature on the identification and estimation of ex ante returns (and option values), which are understood as fundamental drivers of individuals' decisions. Most contributions use a revealed preference approach (Heckman et al, 2006;Heckman and Navarro, 2007;Stange, 2012;Trachter, 2015;Lee et al, 2015;Eisenhauer et al, 2015;Bhuller et al, 2022). The use of the stated preference approach makes this research closer to Wiswall and Zafar (2018); Koşar et al (2021) and Arcidiacono et al (2020).…”

The (Option-) Value of Overstaying

“…It arises because overstaying preserves the chance of becoming regularised in the future, if one wishes. This class of options is studied, for example, by Comay et al (1973), Trachter (2015, Lee et al (2015), and Bhuller et al (2022) in the context of post-secondary education, where the chance of further education increases the value of lower-level degrees, or by Katz and Rapoport (2005) in the context of the brain drain. Section 6 also studies the option value generated by the chance of being deported, using Equation (5.5) with the chance of deportation replacing the chance of regularisation.…”