Working Paper

Stepping Stone and Option Value in a Model of Postsecondary Education

Abstract: A stepping stone arises in risky environments with learning and transferable human capital. An example is the role played by academic two-year colleges in postsecondary education: Students, as they learn about the uncertain educational outcomes, can drop out or transfer up to harder and more rewarding schools, carrying a fraction of the accumulated human capital. A theory of education is built and contrasted empirically to find that i) option value explains a large part of returns to enrollment, ii) enrollment in academic two-year colleges is driven by the option to transfer up, and iii) the value of the stepping stone is small.

Keywords: stepping stone; investment under uncertainty; academic learning; postsecondary education; college education; returns to education;

JEL Classification: D83; I21; J24;

Bibliographic Information

Provider: Federal Reserve Bank of Richmond

Part of Series: Working Paper

Publication Date: 2014-02-04

Number: 14-3

Pages: 91 pages