Comparing two approaches to the rate of return to investment in education

Orhan Kara

Education Economics, 2010, vol. 18, issue 2, 153-165

Abstract: The economic value of investment in education has typically been measured by its rate of return, frequently estimated by the internal rate of return or the earning function approach. Given the importance of the rate of return estimates for individuals and countries, especially developing countries, in making decision on educational investment, we need to know how these methods compare as empirical researchers have used only one method, mainly due to data constraints. This study presents and compares the rate of return estimates obtained from these two methods using household data-sets that have been typically employed in such studies. The results of the study confirm the previously established stylized facts about the rate of return to education. In addition, the internal rate of return approach exhibits 'diminishing returns' to schooling, reflecting ever rising cost of higher increments of schooling, while the earning function approach yields the opposite pattern, reflecting the greater relative increase associated in earnings with additional schooling. Moreover, the rate of return is greater using the internal rate of return approach than the earning function approach. Finally, the internal rate of return approach reveals a more accurate estimate of the earning return to the actual amount invested in schooling, whereas the earning function approach is more thorough in measuring earning differences associated with additional schooling.

Keywords: cost of education; economics of education; investment in human capital; rate of return; Turkey (search for similar items in EconPapers)
Date: 2010
References: View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://www.tandfonline.com/10.1080/09645290802416486 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:edecon:v:18:y:2010:i:2:p:153-165

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/CEDE20

DOI: 10.1080/09645290802416486

Access Statistics for this article

Education Economics is currently edited by Caren Wareing and Steve Bradley

More articles in Education Economics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().