SOURCE: Federal Reserve Bank of Richmond

Federal Reserve Bank of Richmond

December 03, 2015 15:19 ET

Richmond Fed's Economic Quarterly Explores the Dropout Option in a Model of College Education

RICHMOND, VA--(Marketwired - December 03, 2015) - It has been estimated that college graduates earn substantially more than those who do not pursue higher education. But the high rates of return associated with college graduation seem at odds with the low enrollment and graduation rates evident in the data.

In this issue of Economic Quarterly, economists Nicholas Trachter of the Richmond Fed and Ali Ozdagli of the Boston Fed present a simple dynamic model of education where some students are pessimistic about their ability to accumulate human capital in college and find it optimal to join the workforce instead of pursuing higher education, while others are more optimistic and enroll. During the course of their college careers, students receive additional information about their abilities and update their beliefs regarding the expected wage effects of continued attendance. Some will continue and graduate while others will drop out.

Using a calibrated version of the model to gauge the importance of the dropout option in shaping up returns to postsecondary education, the authors find that the dropout option accounts for a large fraction of the measured returns.

This article and others in the latest issue of Economic Quarterly are available on our website.

Also in this issue:

  • Loan Guarantees for Consumer Credit Markets by Kartik B. Athreya, Xuan S. Tam, and Eric R. Young
  • Optimal Institutions in Economies with Private Information: Exclusive Contracts, Taxes, and Bankruptcy Law by Borys Grochulski and Yuzhe Zhang

The Economic Quarterly is a free publication containing economic analysis pertinent to Federal Reserve monetary and banking policy. More information is available at (800) 322-0565 or online.

The Richmond Fed serves the Fifth Federal Reserve District, which includes the District of Columbia, Maryland, North Carolina, South Carolina, Virginia and most of West Virginia. As part of the nation's central bank, we're one of 12 regional Reserve Banks that work together with the Federal Reserve's Board of Governors to strengthen the economy and our communities. We manage the nation's money supply to keep inflation low and help the economy grow. We also supervise and regulate financial institutions to help safeguard our nation's financial system and protect the integrity and efficiency of our payments system.

Contact Information

  • Amanda Kramer
    Senior Managing Editor
    Federal Reserve Bank of Richmond Economic Quarterly
    Email contact