Stepping stone and option value in a model of postsecondary education

Nicholas Trachter

Quantitative Economics, 2015, vol. 6, issue 1, 223-256

Abstract: A stepping stone arises in risky environments with learning and transferrable human capital. An example is the role played by academic two‐year colleges in postsecondary education: Students, as they learn about the uncertain educational outcomes, can drop out or transfer up to harder and more rewarding schools, carrying a fraction of the accumulated human capital. A theory of education is built and contrasted empirically to find that (i) option value explains a large part of returns to enrollment, (ii) enrollment in academic two‐year colleges is driven by the option to transfer up, and (iii) the value of the stepping stone is small.

Date: 2015
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Working Paper: Stepping Stone and Option Value in a Model of Postsecondary Education (2014)
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