On the Distribution of College Dropouts: Wealth and Uninsurable Idiosyncratic Risk

Abstract:     
We present a dynamic model of college education where the students face uncertainty about their income stream after graduation due to unobserved heterogeneity in their innate scholastic ability. As students write exams, they reevaluate their expectations and may find it optimal to drop out and join the workforce without reaping the whole benefit of college education. The model shows that, in accordance with the data, poorer students are less likely to graduate and are more likely to drop out earlier than wealthier students. Our model generates these results without introducing credit constraints. Conditioning on measures of innate ability, we find in the data that poor students are at least 30% more likely to drop and they do so before rich students.

Number of Pages in PDF File: 30

Keywords: dropout, wealth effect, idiosyncratic risk

JEL Classification: J24, I21, I22

working papers series