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Economic Quarterly

Dec. 3, 2015

Richmond Fed's Economic Quarterly Explores the Dropout Option in a Model of College Education

Richmond, Va.

It has been estimated that college graduates earn substantially more than those who do not pursue higher education. But the high rates of return associated with college graduation seem at odds with the low enrollment and graduation rates evident in the data.

In this issue of Economic Quarterly, economists Nicholas Trachter of the Richmond Fed and Ali Ozdagli of the Boston Fed present a simple dynamic model of education where some students are pessimistic about their ability to accumulate human capital in college and find it optimal to join the workforce instead of pursuing higher education, while others are more optimistic and enroll. During the course of their college careers, students receive additional information about their abilities and update their beliefs regarding the expected wage effects of continued attendance. Some will continue and graduate while others will drop out.

Using a calibrated version of the model to gauge the importance of the dropout option in shaping up returns to postsecondary education, the authors find that the dropout option accounts for a large fraction of the measured returns.

This article and others in the latest issue of Economic Quarterly are available on our website.

Also in this issue:

  • Loan Guarantees for Consumer Credit Markets by Kartik B. Athreya, Xuan S. Tam, and Eric R. Young
  • Optimal Institutions in Economies with Private Information: Exclusive Contracts, Taxes, and Bankruptcy Law by Borys Grochulski and Yuzhe Zhang

The Economic Quarterly is a free publication containing economic analysis pertinent to Federal Reserve monetary and banking policy. More information is available at (800) 322-0565 or online.


As part of our nation’s central bank, the Richmond Fed is one of 12 regional Reserve Banks working together with the Board of Governors to support a healthy economy and deliver on our mission to foster economic stability and strength. We connect with community and business leaders across the Fifth Federal Reserve District — including the Carolinas, District of Columbia, Maryland, Virginia, and most of West Virginia — to monitor economic conditions, address issues facing our communities, and share this information with monetary and financial policymakers. We also work with banks to ensure they are operating safely and soundly, supply financial institutions with currency that’s fit for distribution, and provide a safe and efficient way to transfer funds through our nation’s payments system.

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