Education choice under uncertainty: Implications for public policy |
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Authors: | Vincent Hogan Ian Walker |
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Affiliation: | aUniversity College Dublin, School of Economics, Belfield, Dublin 4, Ireland;bUniversity of Warwick, Coventry CV4 7AL, UK;cThe Institute of Fiscal Studies, London, UK |
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Abstract: | We analyse how progressive taxation and education subsidies affect schooling decisions when the returns to education are stochastic. We use the theory of real options to solve the problem of education choice in a dynamic stochastic model. We show that education attainment will be an increasing function of the risk associated with education. Furthermore, this result holds regardless of the degree of risk aversion. We also show that progressive taxes will tend to increase education attainment. |
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Keywords: | Education choice Dynamic optimization Optimal stopping Uncertainty |
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