College Risk and Return

Gonzalo Castex

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: Attending college is thought of as a very profitable investment decision, as its estimated annualized return ranges from 8% to 13%. However, a large fraction of high school graduates do not enroll in college. I reconcile the observed high average returns to schooling with relatively low attendance rates when considering college as a risky investment decision. A high dropout risk has two important effects on the estimated average returns to college: selection bias and risk premium. In order to explicitly consider the selection bias, I explore the dropout risk in a life-cycle model with heterogeneous ability. The risk-premium of college participation accounts for 21% of the excess returns to college education for highability students and 19% of the excess return for low-ability students. 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.

Date: 2011-01
New Economics Papers: this item is included in nep-edu and nep-lab
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Journal Article: College risk and return (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:chb:bcchwp:606

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