Mismatch in Human Capital Accumulation

56 Pages Posted: 22 Feb 2016

See all articles by Russell Cooper

Russell Cooper

University of Texas at Austin - Department of Economics; National Bureau of Economic Research (NBER)

Huacong Liu

Pennsylvania State University

Date Written: February 2016

Abstract

This paper studies the allocation of heterogeneous agents to levels of educational attainment. The goal is to understand the magnitudes and sources of mismatch in this assignment, both in theory and in the data. The paper presents evidence of substantial mismatch between ability and educational attainment across 21 OECD countries, with a focus on Germany, Italy, Japan and the US. In the model, mismatch originates from: (i) taste shocks, (ii) binding borrowing constraints and (iii) noisy measures of ability in test scores. The model is estimated using a simulated method of moments approach. The main finding is that measured mismatch arises largely from noise in test scores and does not reflect borrowing constraints. Differences in tastes for education across households play a minor role in explaining mismatch. Further, the estimation allows us to decompose the college wage premium, isolating cross-country differences in selection effects from the return to education.

Suggested Citation

Cooper, Russell W. and Liu, Huacong, Mismatch in Human Capital Accumulation (February 2016). NBER Working Paper No. w22010. Available at SSRN: https://ssrn.com/abstract=2736086

Russell W. Cooper (Contact Author)

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Huacong Liu

Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

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