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Understanding the Income Gradient in College Attendance in Mexico: The Role of Heterogeneity in Expected Returns to College,” Working Paper
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@MISC{Kaufmann_understandingthe,
author = {Katja Maria Kaufmann and Jel-classification I and Aprajit Mahajan and John Pencavel},
title = {Understanding the Income Gradient in College Attendance in Mexico: The Role of Heterogeneity in Expected Returns to College,” Working Paper},
year = {}
}
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Abstract
This paper studies the determinants of college attendance in Mexico. I use subjective quantitative expectations of future earnings to analyze both the causes and the implications of the steep income gradient in higher-education enrollment. In particular, I examine whether data on individuals ’ expected returns to college as well as on their perceived earnings risk can improve our understanding of heterogeneity in college attendance choices. I find that while expected returns and perceived risk from human capital investment are important determinants, lower returns or higher risk are not sufficient, alone, to explain the poor’s low attendance rates. I also find that poor individuals require significantly higher expected returns to be induced to attend college, implying that they face significantly higher costs than individuals with wealthy parents. I then test predictions of a simple model of college attendance choice in the presence of credit constraints, using parental income and wealth as a proxy for the household’s (unobserved) interest rate. I find that poor individuals with high expected returns are particularly responsive to changes in direct costs such as tuition, which is consistent with credit constraints playing an important role. To evaluate potential welfare implications of introducing a means-tested student loan program, I apply the Local Instrumental Variables approach of Heckman and Vytlacil (2005) to my model of college attendance choice. I find that a sizeable
Keyphrases
college attendance college attendance choice working paper income gradient expected return poor individual credit constraint important role local instrumental variable approach means-tested student loan program parental income important determinant higher-education enrollment human capital investment earnings risk paper study poor low attendance rate simple model interest rate steep income gradient potential welfare implication subjective quantitative expectation direct cost future earnings wealthy parent
