Beliefs, Choice Structure, and Human Capital Investment

Abstract

The decision to pursue a college education has extensive economic implications, and economists have studied this decision for decades. However, the current economic approach to educational choice oversimplifies the decision, and cannot adequately explain student behavior. I relax several standard assumptions of educational choice models to allow for a more realistic approach to student beliefs and a more flexible approach to the structure of the choice. First, using a novel survey data set, I demonstrate that observed labor market conditions are a poor proxy for student perceptions of labor market payoffs to education. Then, using those student perceptions, I estimate student demand for education. I show that, contrary to common assumption, financial reward plays only a small part in educational choice, and consumption value is more central in driving student plans. Finally, I model college choice more realistically as a two-agent bargaining problem between parent and student. Using a choice experiment, I show that parent and student preferences differ, and demonstrate the implications of this difference on choice and the construction of effective education policy.