| Abstract: | This paper develops and estimates a theoretical model of an individual's high school graduation choice. The model incorporates the idea of a utility-maximizing youth responding to the economic incentives associated with incremental education, as posited by the human capital literature. However, it also allows for family, neighborhood, and school characteristics to affect the process of being educated, as posited by the education production function literature. Estimation of the model, using the Panel Study of Income Dynamics (PSID) supplemented with neighborhood and school data, indicates that indeed students respond to economic incentives in making education choices; however, most of the effects of background characteristics are working through the education process rather than affecting returns to schooling. |
