Investment in Education Under Disappointment Aversion

Anderberg, Dan; Cerrone, Claudia

doi:10.2139/ssrn.2865573

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Investment in Education Under Disappointment Aversion

MPI Collective Goods Preprint, No. 2016/16

10 Pages Posted: 7 Nov 2016

See all articles by Dan Anderberg

Dan Anderberg

University of London, Royal Holloway College - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Claudia Cerrone

Middlesex University; Max Planck Institute for Research on Collective Goods

Date Written: November 2016

Abstract

This paper develops a model of risky investment in education under disappointment aversion, modeled as loss aversion around one's endogenous expectation. The model shows that disappointment aversion reduces the optimal investment in education for lower ability people and increases it for higher ability people, thereby magnifying the investment gap between them generated by the riskiness of education. Policies aimed at in influencing students' expectations can reduce early dropout.

Keywords: education, risk, disappointment aversion, endogeneous reference points

JEL Classification: D03, D81, I21

Suggested Citation: Suggested Citation

Anderberg, Dan and Cerrone, Claudia and Cerrone, Claudia, Investment in Education Under Disappointment Aversion (November 2016). MPI Collective Goods Preprint, No. 2016/16, Available at SSRN: https://ssrn.com/abstract=2865573 or http://dx.doi.org/10.2139/ssrn.2865573