Week 7: Education - Model Of Parent’s Educational Choice Flashcards
Education obviously has private returns.
What are social returns examples (2)
Less crime
More tech progress (innovation)
Model of educational choice: Parents utility expression
What is it a function of?
U (y , S) = m x log y (S) - c (S)
m is parental valuation of education
c (S) is cost of education
Parents utility - is a function of schooling (S) and earnings of child when they grow up(y)
Criticisms of this SIMPLE model (2)
Education can have consumption value
Omits life expectancy on parents utility - benefits to education increase when live longer
Earnings formula for child
log y = a + bs
b is the return to each additional year of school (s)
E.g if b=0.1 10% increase in earnings per year
Cost of education function - 2 components
Direct schooling fees
Opportunity cost (of not working straight away)
Cost Expression
c(S) = rS +1/2øS²
r is direct cost per year (hence why we times by S years of schooling)
Is cost function concave or convex and why?
Convex - while r (direct cost) is fixed per year, opportunity cost increases with age and years of schooling level
Solving the problem for optimal schooling
LEARN HOW TO ACTUALLY DERIVE PG 10
….
S* = mb - r / ø
What influences parents to invest in education? (4)
b - return per additional year of schooling
m - parental valuation of education
r - fixed direct cost per year
Ø - indirect costs
Using S*=mb - r /ø
What determines return to education (b) (5)
Market (supply and demand)
Skill-bias in technology (if educated people required)
Quality of education
Ability of child
No. of years worked once adult
First 2 are market based!
No. of years they will work when adult, and Eval
If women stop working as soon as they marry, lower return to education (remember my econometrics essay on career breaks preventing higher returns!)
Eval: if more education can lead to a richer husband, thus also is a form of return to education
Returns vs perceived returns: which ones are parents concerned about?
Parents are concerned about perceived b (returns to education) - they act upon beliefs
Even if true b is high, they underinvest if they perceive a low b
What determines parental valuation of education (m) (7)
Altruism level - how much they value their child’s utility
Share of child’s future earnings - i.e in countries with generous pensions, they do not need child support so lower m
Discount factor (earnings in future, so returns discounted)
Prestige
Child gender
Parent gender (women live longer, so need more support so higher m)
Amount of children (quality quantity trade off - potentially lower m if more children, consider elite bias picking a winner too)
What determines costs of education (r) and indirect costs ø
Direct costs
- policy regarding school costs (free, or not?)
-credit constraints - no access, must sacrifice consumption, which may not be possible if poor
Indirect
- depends on how much child could earn if working
