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What is the (Real Option) Value of a College Degree?
Abstract
The value of a college degree is often quantified as the difference in earnings between those with and without a degree. The research presented here operationalizes this idea in two important ways. First, since future income and tuition are uncertain, a contingent claims model is developed and the appropriate discount rate for valuing future earnings is, therefore, endogenized given an economy that does not permit arbitrage. Second, the model is sensitive to the valuation of the real option to obtain an advanced degree in addition to the valuation of the earnings for an individual with an undergraduate degree. In this framework, the value of a high school diploma is shown to be the sum of: (1) capitalized earnings, (2) the real option to obtain an undergraduate degree and (3) the embedded or compound real option to obtain an advanced degree. Numerical examples are presented that demonstrate the performance and key drivers of the model. One important finding is that by ignoring the real options to further one's education, the value of a college degree is likely significantly understated.
... Licensing has become an indicator of a person's skills and capabilities. Stokes (2014) demonstrated that students who started working after graduating with a degree or had attained a license in a specific field had significantly higher salaries compared to those who worked before studying for a degree or attaining a license. Pagliero (2010) observed that effectively reducing the pass rate of licensing exams and enforcing stricter licensing requirements would result in licensed professionals having higher salaries. ...
... Regarding education level as a variable, there is a growing trend of employees pursuing higher-level degrees in order to compensate for their lack of professional expertise (Ghaffarzadegan et al., 2017;Tsai, 2010). Most studies have found that in the United States, the salary gap between workers holding a college degree and those without one is widening which is attributed to the increasing demand for technical skills in the labor market (Eckstein et al., 2019;Stokes, 2014). The social contributions of university graduates nowadays differ from those in the past due to the expansion of higher education in Taiwan. ...
Article History Keywords Average treatment effect on the treated Income License Propensity score matching Real estate agent. This study explored the influence of real estate licenses on their income. The potential interference of personal attributes was controlled using propensity score matching to reduce selection bias. On average, the matching results showed that the treatment effect was 0.42 indicating that licensed agents had a 42% higher monthly income than unlicensed agents after matching. The regression found that the coefficient of licensing was 0.397 at a 5% significance level. Indeed, licensed agents had a 48.7% higher monthly income than unlicensed agents. This indicates that the monthly income gap between licensed and unlicensed agents was smaller after accounting for the estimation efficiency and including the control variables. The main reason for the large differences between our findings and those of previous studies is the use of regression analysis in the latter. The results suggest that real estate agents should be more aware of the importance of professional licensing for gaining a higher income. Contribution/Originality: Previous research has explored the relationship between licensing and salary levels, the unique characteristics of the real estate industry and its licensing system mean that few studies have accounted for the selection bias introduced by confounding factors that may influence income levels. To address this, the study applied propensity score matching (PSM) to control for the effects of these factors and minimize selection bias, enabling a more accurate comparison of income differences between licensed and non-licensed agents.
... Besides the lease contract,Stokes (2013) also identi¯ed the embedded option in pursuing an undergraduate degree or graduate degree to value a college degree. ...
Due to the tightening of conditions required to obtain a mortgage loan following the recent financial crisis, the rent-to-own contract and contract for deed sales for residential real estate have become increasingly popular among potential home buyers and sellers. In this study, after analyzing the embedded options in the contracts, I use option-theoretic methods to develop models for valuing both contracts for deed sale and rent-to-own contracts, which can be used to determine equilibrium monthly payments and the equilibrium down payment.
... If the period of courtship reveals favourable future marital life, a formal marriage is exercised otherwise the partners can cancel future marriage plans. Real option approach has also been employed in the valuation of a college degree (Stokes J. R., 2013). Real option-like features include the uncertain future tuition and income and opportunity for follow-on investments in postgraduate degrees and their effects on the valuation of a college degree. ...
Psychic costs are the most important component of the papers that are trying to match empirical facts related with college enrollment and dropout decisions of high school graduates. The absense of psychic cost requires very high levels of risk aversion to duplicate the same facts. However, psychic costs lack any economic meaning and treated as an obscure idiosyncratic component of utility function in influential papers such as Keane and Wolpin (1997) and Carneiro, Hansen, Heckman (2003). In this paper, we model college enrollment and dropout decisions in a real options model similar to Miao and Wang (2007) where the psychic cost stems from the initial belief of students about their skill level and the option value stems from the Bayesian learning process of one's skill level. First, our model shows that papers that assume risk neutrality overestimate the value of college, college enrollment and graduation rates because the outcome of college education is risky. Second, we show that the option value of learning is much more important when agents are risk averse rather than risk neutral. Finally, we suggest a welfare improving policy that decreases both the pyschic costs, college enrollment and graduation rates whereas a decrease in the psychic costs in the aforementioned papers would increase both the college enrollment and graduation rates.
This paper quantifies the option value arising from sequential schooling decisions made in the presence of uncertainty and learning about academic ability. College attendance has option value since enrolled students have the option, but not obligation, to continue in school after learning their aptitude and tastes. I estimate that option value accounts for 14 percent of the total value of the opportunity to attend college for the average high school graduate and is greatest for moderate-aptitude students. Students' ability to make decisions sequentially in response to new information increases welfare and also makes educational outcomes less polarized by background. (JEL D83, I23)
As technological developments have altered production techniques, types of mechanical equipment, and varieties of outputs, society has begun to recognize that economic progress involves not only changes in machinery but also in men – not only expenditures on equipment but also on people. Investment in people makes it possible to take advantage of technical progress as well as to continue that progress. Improvements in health make investment in education more rewarding by extending life expectancy. Investment in education expands and extends knowledge, leading to advances which raise productivity and improve health. With investment in human capital and non-human capital both contributing to economic growth and welfare and in what is probably an interdependent manner, more attention should be paid to the adequacy of the level of expenditures on people.
One measure of the health of the Social Security system is the difference between the market value of the trust fund and the present value of benefits accrued to date. How should present values be computed for this calculation in light of future uncertainties? We think it is important to use market value. Since claims on accrued benefits are not currently traded in financial markets, we cannot directly observe a market value. In this paper, we use a model to estimate what the market price for these claims would be if they were traded. In valuing such claims, the key issue is properly adjusting for risk. The traditional actuarial approach – the approach currently used by the Social Security Administration in generating its most widely cited numbers - ignores risk and instead simply discounts “expected†future flows back to the present using a risk-free rate. If benefits are risky and this risk is priced by the market, then actuarial estimates will differ from market value. Effectively, market valuation uses a discount rate that incorporates a risk premium. Developing the proper adjustment for risk requires a careful examination of the stream of future benefits. The U.S. Social Security system is “wage-indexedâ€: future benefits depend directly on future realizations of the economy-wide average wage index. We assume that there is a positive long-run correlation between average labor earnings and the stock market. We then use derivative pricing methods standard in the finance literature to compute the market price of individual claims on future benefits, which depend on age and macro state variables. Finally, we aggregate the market value of benefits across all cohorts to arrive at an overall value of accrued benefits. We find that the difference between market valuation and “actuarial†valuation is large, especially when valuing the benefits of younger cohorts. Overall, the market value of accrued benefits
In this paper, the analysis of college major choice is extended to include the option value of college attendance represented by the probability of and rewards from graduate school attendance. The results for men indicate that the option value is a significant, positive factor in the choice of liberal arts and science majors and is larger in all majors except computer science/engineering, for those with lower earnings at the undergraduate level. In contrast, while women may receive more after a graduate degree in any major, the option value is only significant in their choice of liberal arts and science majors. [JEL I21, J24]
of Fin. 2013.03. Downloaded from www.worldscientific.com by UNIVERSITY OF BRISTOL on 03/03/15. For personal use only. Table 2. Present value of undergraduate earnings plus the value of the graduate option
- J Quart
Quart. J. of Fin. 2013.03. Downloaded from www.worldscientific.com by UNIVERSITY OF BRISTOL on 03/03/15. For personal use only. Table 2. Present value of undergraduate earnings plus the value of the graduate option (F b ).
Downloaded from www.worldscientific.com by UNIVERSITY OF BRISTOL on 03 For personal use only. References Carnevale, A What's It Worth? The Economic Value of College Majors The Big Payo®: Educational Attain-ment and Synthetic Estimates of Work-Life Estimates
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Is College Still Worth it?
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Kelly, B., 2010, Is College Still Worth it? U.S. News & World Report 147(8), 6.
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Sanchez, J., and F. Laanan, 1997, What Is It Worth? The Economic Value of Obtaining a Certi¯cate or Associate Degree from California Community Col-leges, Paper presented at the annual conference of the California Association for Institutional Research, San Francisco, CA. Stange, K., 2012, An Empirical Investigation of the Option Value of College En-rollment, American Economic Journal: Applied Economics 4(1), 49–84.
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Cheeseman Day, J., and E. Newburger, 2002, The Big Payo®: Educational Attainment and Synthetic Estimates of Work-Life Estimates, U.S. Department of
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- J Strohl
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What is the (Real Option) Value of a College Degree?
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