On the Distribution of College Dropouts: Wealth and Uninsurable Idiosyncratic Risk
33 Pages Posted: 4 Apr 2011 Last revised: 6 Aug 2015
Date Written: August 5, 2015
We present a dynamic model of the decision to pursue a college degree in which students face uncertainty about their future income stream after graduation due to unobserved heterogeneity in their innate scholastic ability. After matriculating and taking some exams, students reevaluate their expectations about succeeding in college and may decide to drop out and start working. The model shows that, in accordance with the data, poorer students are less likely to graduate and are likely to drop out sooner than wealthier students. Our model generates these results without introducing explicit credit constraints.
Keywords: dropout, wealth effect, idiosyncratic risk
JEL Classification: J24, I21, I22
Suggested Citation: Suggested Citation