The Old College Try: Estimating the Role of Uncertainty, Suitability, and Opportunity Costs in the Experiment called College

I estimate a model that frames college enrollment as an experiment, which can result in drop-out or graduation. The decision to participate in this experiment depends on the expected suitability for college, the degree of uncertainty about this suitability, and the cost of failing the experiment (dropping out) relative to the benefit of succeeding (graduating). I find that 26% of the high-school graduates who are suitable for college do not enroll, while 40% of those who enroll are not suitable and drop out of college. The relatively high drop out rate of minorities is in part explained by their lower costs of failing relative to the benefits of succeeding. Hence, minorities are more likely to enroll in college conditional on their suitability. Parental college attendance is also associated with a lower cost / benefit ratio of college. Parental income is not associated with the cost / benefit ratio. Parental income and education are associated with suitability for college, even after conditioning on performance in an aptitude test. I find evidence suggesting that parental college attendance leads to less uncertainty about the suitability for college. The paper shows how uncertainty in a choice process can be studied by considering sequential choices.