Does Risk Matter? A Semiparametric Model for Educational Choices in the Presence of Uncertainty
34 Pages Posted: 5 Mar 2012
Date Written: October 17, 2011
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 identification of the causal contribution of education to uncertainty in future payoffs. 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 flexible semiparametric procedure allowing for self selection, bounds for the effect of field 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 confirm that individuals self-select into education in order to minimize uncertainty and maximize returns. Only selection of Humanities type of majors is unaffected by risk or expected returns.
Keywords: Wage inequality, Wage uncertainty, Unobserved heterogeneity, Variance differential, Selection bias, Decision-Making under Risk and Uncertainty, Semiparametric estimation
JEL Classification: C14, C34, D81, J31
Suggested Citation: Suggested Citation