Conference Paper Understanding Society Research Conference, 24-26 July 2013, University of Essex
Subjective expectations about the returns to schooling and the decision to go to university
25 Jul 2013
Most economic decisions involve uncertainty and are therefore shaped not only by individual preferences but also by expectations of future outcomes. Understanding the expectations that individuals have is thus critical for understanding their behavior—in particular, for major life decisions such as schooling choices—and for modeling the effects of policies. For example, several explanations could rationalize why many young individuals do not go to university. One possibility is that they expect low returns to schooling. Another alternative is that they face high attendance costs or credit constraints. Without data on expectations we cannot separate these two explanations, yet doing so is important for designing policies that promote schooling. Higher education is a priority in UK government policy. In this context, it is relevant to understand youth’s decision to go to university. This decision critically depends on individuals’ (and parental) perception about the returns to schooling and about the cost involved. While a large literature estimates the returns to schooling with earnings data, it is the returns perceived by students and/or their parents that influence actual schooling decisions We have collected new data from the UK Innovation Panel of Understanding Society Wave 5 to elicit from youth (and parents) the subjective probability of applying to university, the probability of being employed at age 30 if they have a university degree in several fields and if they don’t; expected earnings at age 30 if they have a university degree in several fields and if they don’t; expected costs and hours of study if they go to university. We will evaluate whether youth and their parents have systematic misperception about the returns to a university degree, and the relative role of expectations about future earnings and credit constraints in shaping youth’s decision to attend university.