Stepping Stone and Option Value in a Model of Postsecondary Education
37 Pages Posted: 8 Feb 2014
Date Written: February 4, 2014
Abstract
A stepping stone arises in risky environments with learning and transferable human capital. An example is the role played by academic two-year colleges in postsecondary education: Students, as they learn about the uncertain educational outcomes, can drop out or transfer up to harder and more rewarding schools, carrying a fraction of the accumulated human capital. A theory of education is built and contrasted empirically to find that i) option value explains a large part of returns to enrollment, ii) enrollment in academic two-year colleges is driven by the option to transfer up, and iii) the value of the stepping stone is small.
Keywords: stepping stone, investment under uncertainty, academic learning, postsecondary education, college education, returns to education
JEL Classification: D83, I21, J24
Suggested Citation: Suggested Citation