Stay in School or Start Working? - The Human Capital Investment Decision under Uncertainty and Irreversibility

Abstract

As the time of leaving school determines the level of academic achievement this timing decision is central for the human capital investment decision. Real option theory offers a new perspective of the human capital investment decision under uncertainty and irreversibility. Unlike other approaches we include accumulative schooling costs, and provide a full analytical discussion of all determinants of the decision to terminate education and enter the labor market. Further, as we are able to look at a sequence of formal qualification levels, each characterized by various cost and income profiles we can discuss discontinuities and sheepskin effects within this approach.

Keywords: human capital theory, uncertainty, irreversibility

JEL Classification: J24, D81, I20