An Empirical Investigation of the Option Value of College Enrollment

Since the pioneering work of Gary Becker and Jacob Mincer, the application of investment theory to the study of individuals’ education decisions has become commonplace. People are assumed to weigh short-term costs against future benefits and choose the schooling level that maximizes welfare. This static framework abstracts from uncertainty and suggests that few people should drop out if the marginal earnings gain from graduating is high, as it appears to be. In reality, schooling decisions involve much uncertainty, outcomes often deviate from expectations, and dropout is common. Despite its salience and its importance to investment generally, uncertainty has historically received relatively little attention in the study of education. This paper examines the consequences of educational uncertainty using a structural model in which schooling decisions are sequential and academic ability is learned