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>Understanding schooling: Using observed choices to infer agent's information in a dynamic model of schooling choice when consumption allocation is subject to borrowing constraints.
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Understanding schooling: Using observed choices to infer agent's information in a dynamic model of schooling choice when consumption allocation is subject to borrowing constraints.
In this paper, I use economic theory and estimates of a semiparametrically identified structural model to analyze the role played by uncertainty and its interaction with credit constraints and preferences in explaining schooling attendance. A methodology for inferring information available to the agent from individual choices is proposed and implemented. The proposed test distinguishes which of the unobserved (to the analyst) components of future outcomes are known to the agent and which are unknown to both at a given stage of the life cycle. I use microdata on earnings; schooling and consumption to infer the agent's information set and estimate a structural model of schooling choice and consumption allocation under uncertainty in which borrowing constraints arise in equilibrium. I estimate that future earnings are highly predictable by the agent. However, eliminating uncertainty entirely, almost 20% of high school graduates would instead choose to be college graduates and almost 25% of college graduates would regret their choice under uncertainty and pick high school instead. Moving to a no tuition economy would increase college attendance from 44% to 49%. This number is an upper bound on the effect of relaxing the constraint so that people can afford college.
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