Stepping Stone and Option Value in a Model of Postsecondary Education

37 Pages Posted: 8 Feb 2014

See all articles by Nicholas Trachter

Nicholas Trachter

Federal Reserve Banks - Federal Reserve Bank of Richmond

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

Trachter, Nicholas, Stepping Stone and Option Value in a Model of Postsecondary Education (February 4, 2014). FRB Richmond Working Paper No. 14-03, Available at SSRN: https://ssrn.com/abstract=2391875 or http://dx.doi.org/10.2139/ssrn.2391875

Nicholas Trachter (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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