An Empirical Investigation of the Option Value of College Enrollment

Abstract

This paper quantifies the option value arising from sequential schooling decisions made in the presence of uncertainty and learning about academic ability. College attendance has option value since enrolled students have the option, but not obligation, to continue in school after learning their aptitude and tastes. I estimate that option value accounts for 14 percent of the total value of the opportunity to attend college for the average high school graduate and is greatest for moderate-aptitude students. Students' ability to make decisions sequentially in response to new information increases welfare and also makes educational outcomes less polarized by background. (JEL D83, I23)

The Labor-Market Returns to Community College Degrees, Diplomas, and Certificates

“…The exclusion of transfer students potentially induces bias by excluding perhaps the most able students in community college. Furthermore, this exclusion understates the return to associate's degrees due to the option value of continued enrollment in four-year schools (Stange 2012). …”

“…Stange (2012) shows that, for male high school graduates, the overall option value of postsecondary schooling is above 10 percent of the total return to education. The option value is higher for moderate-ability students, many of whom attend community colleges.…”

Flexibility at a cost – Should governments stimulate tertiary education for adults?

“…Within early representations of human capital models, the implication is that 6 educational investments should be made early in life to allow as much time as possible to reap the rewards (Becker 1962). Other models acknowledge that continuously updated information affects dynamic optimizing behavior, which may also imply investments in formal education later in life (e.g., Comay et al 1973, Cameron and Heckman 2001, Stange 2012. Economic fluctuations constitute one such source of information that potentially compels adults to enroll in education (Heckman and Urzua 2008, Ikenaga and Kawaguchi 2013, Pissarides 2011.…”

How risky is college investment?

“…Compared with most previous studies, we also have access to more detailed data on college costs, scholarships, loans, parental transfers, and earnings in college. Stange (2012) also uses transcript data to estimate a model of risky college completion.…”