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Title: College Risk and Return

Citation Type: Miscellaneous

Publication Year: 2010

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Abstract: Attending college has been considered one of the most pro table investment decisions, asits estimated annualized return ranges from 8% to 13%. However, a large fraction of high schoolgraduates do not enroll in college. Using a simple risk premium approach, I reconcile the observedhigh average returns to schooling with relatively low attendance rates. A high dropout risk hastwo important e ects on the estimated average returns to college: selection bias and risk premium.Once taking into account dropout risk, a simple calculation of risk premium accounts for 51% ofthe excess of return to college education. In order to explicitly consider the selection bias, I furtherexplore the dropout risk in a life-cycle model with heterogeneous ability. The risk-premium ofcollege participation accounts for 29% of the excess of returns to college education for high-abilitystudents, and accounts for 27% of the excess return for low-ability students, since they face alarger college dropout risk. Risk averse agents are willing to reduce their return to college inorder to avoid the dropout risk. The e ect is not uniform across ability levels.

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Authors: Castex, Gonzalo

Publisher: University of Rochester

Data Collections: IPUMS USA, IPUMS CPS

Topics: Education

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