Educational Choices, Subjective Expectations, and Credit Constraints

Abstract

In this paper we analyze the link between people's "subjective" expectations of returns to schooling and their decision to invest into schooling. We use data from a household survey on Mexican junior and senior high school graduates that elicits their own and their parents' beliefs about future earnings for different scenarios of highest schooling degree. These data allow us to derive measures of expected idiosyncratic returns to schooling as well as measures of individual risk perceptions of earnings and unemployment risk. Therefore we can analyze for two important school attendance decisions, high school and college, whether parents' or youths' expectations matter and whether expected returns or risk perceptions are important for these two decisions. We find that both youths' and parents' expectations matter in terms of the high school attendance decision, while for the college attendance decision the youths' expectations appear to be the relevant ones. These results suggest that youths play an important role in the intra-family decision process about human capital investments. While often neglected in the literature, risk perceptions are important predictors for high school attendance decisions. College attendance decisions on the other hand depend on expected returns to college. Making use of our data on subjective expectations, we provide evidence on the existence of credit constraints based on the argument that credit constraints would break the link between expected returns (or risk perceptions) and schooling decisions. Our results point towards an important role of credit constraints in college attendance decisions and thus provide one explanation for the large inequalities that can be found in particular in higher education in Mexico.

Understanding the income gradient in college attendance in Mexico: The role of heterogeneity in expected returns

“…In this respect, the poor should be even more likely to enroll in college than the rich if they are more risk-averse. As I will show in Section 4, perceived earnings and unemployment risk are not significant in a regression of college attendance choice (while they are significant in the decision to attend high school (see Attanasio and Kaufmann (2009)), suggesting that the risk measures I use are not simply too noisy). This suggests that risk considerations might not be of first-order importance in this context; for this reason, I do not take them into account in this simple model.…”

“…Nguyen (2008) finds that informing a random subset of children in Madagascar about high returns to schooling increases their attendance rates and their test scores. Attanasio and Kaufmann (2009) address several complementary issues concerning the link between schooling choice and expectations (using the same data as this paper). In addition to using expected returns-as the first two papersthey also take into account perceived earnings and employment risk.…”

The Schooling Decision: Family Preferences, Intergenerational Conflict, and Moral Hazard in the Brazilian Favelas

“…Moreover, when provided with information on actual returns to schooling, the least-poor students in Jensen's analysis were significantly less likely to drop out of school in subsequent years. Attanasio and Kaufmann (2009) use data from a Mexican household survey and provide evidence that mothers have significantly higher expectations on returns to high school than their children in junior high school do. Dinkelman and Martínez (2011) find significant decreases in absenteeism from providing Chilean eighth graders and a subset of their parents with information about financial aid for higher education.…”

Bednets, Information and Malaria in Orissa

“…Mahajan and Tarozzi (2011) uses expectations about state transitions to identify and estimate a dynamic discrete choice model with unobserved types and time-inconsistent agents. Attanasio and Kaufmann (2009) and Kaufmann (2010) explore the role of agents expectations about the returns to schooling in their decision to invest in schooling in a context of credit constraints while Jensen (2010) examines the link experimentally in the Dominican Republic.…”